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Full text of "Cost accounting"

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Digitized by tine Internet Arciiive 

in 2010 with funding from 

University of British Columbia Library 



http://www.archive.org/details/costaccountinOOnich 



Cost Accounting 



By 

J. LEE NICHOLSON, C.P.A. 

Formerly of the firm of J. Lee Nicholson and Company; 
Supervising Cost Accountant, Ordnance Department, U.S.A., 
1917— 18; Ex-President, National Association of Cost Ac- 
countants} Author "Factory Organization and Costs," "Cost 
Accounting Theory and Practice," etc. 



And 

JOHN F. D. ROHRBACH, B.C.S., C.P.A. 

Of the firm of J. Lee Nicholson and Company; formerly 
Instructor in Cost Accounting, Columbia University 




THE RONALD PRESS COMPANY 
NEW YORK 



Copyright, 1919, by 
The Ronald Prkss Company 



PREFACE 

Cost accounting, as a vital factor of successful business 
administration, has, in the last few years, been brought home 
in various ways to many manufacturers who before had never 
seriously appreciated its importance. 

The Federal Trade Commission, working for more stable 
conditions, has conducted a widespread campaign of education, 
explaining in detail what a cost accounting system is, how it 
is operated, and the resulting business advantages. 

Various manufacturers' associations have first paid skilled 
accountants to devise cost-finding methods suited to their spe- 
cial trade conditions, and then have instituted a vigorous propa- 
ganda to induce all engaged in their own particular industry 
to adopt them, thus making these methods uniform in the trade 
and securing uniformity of selling prices and the end of reck- 
less and ignorant price-cutting. 

Now the government, with its need to levy war taxes and 
its consequent necessity for searching investigation into income 
and excess profits, requires that estimates and approximations 
as to production costs and profits shall give place to rational 
accounting systems giving actual figures by uniform methods. 

As a result of this pressure and the more intelligent educa- 
tion in accounting given by the better modern schools, cost ac- 
counting has become the rule in all intelligently conducted 
industries, and its methods have been extended to many estab- 
lishments other than manufacturing industries. 

Under these circumstances it has been found necessary to 
bring out this volume as an extension of Nicholson's "Cost 
Accounting, Theory and Practice" published in 19 13, making 
the work more comprehensive, and bringing it in all respects 
up to the latest practice. In its preparation the authors have 
kept constantly in view the following aims: 



IV 



PREFACE 



First, to classify the details of cost accounting so that the 
reader, be he accountant, manufacturer, or student, is given 
a well-defined idea of the forms and records required for each 
separate operation and of how these forms and records fit 
into the general system used in the particular establishment. 
The need for such a classification has many times been brought 
to the attention of the authors by points raised during con- 
ferences with manufacturers. 

Second, to present additional and specially important 
data, such as the comprehensive table of depreciation rates or, 
pages 146 et seq., and the classification of and distinction be- 
tween asset and perishable tools on pages 509 and 510. Defi- 
nite information of this kind based on standard practice solves 
many of the perplexities which arise when such arbitrary mat- 
ters as depreciation and classification are left to individual 
judgment with its tendency to be biased by the current state- 
ment of profit and loss. 

Similar problems and difficulties have arisen in inter- 
preting the terms of the numerous government contracts made 
during the war period and their cancellation at the time of 
writing. Therefore, the present work is brought up to date 
by a detailed discussion of what may be chargeable to such con- 
tract work and what compensation the contractor may be enti- 
tled to on the cancellation of a fixed price, a fixed profit, or a 
cost-plus contract. 

Acknowledgment is hereby made to Lieutenant-Colonel 
M. F. Griggs and Captain J. P. Carlin of the Ordnance Depart- 
ment, U. S. A., for their valuable contributions to the discus- 
sion of depreciation rates; also to the editorial staff of the 
Ronald Press Company for their careful revision and helpful 
suggestions as to form and arrangement of manuscript. 

The Authors 
January 2, 1919 



CONTENTS 



Part I — Elements and Methods of Cost-Finding 

Chapter Page 

I Cost-Finding and Its Functions i 

Changing Social and Industrial Demands 

Phases of Efficiency Progress 

Importance of Cost-Finding 

Functions of Cost Accounting 

Cost Accounting as Related to General Accounting 

Objections to Cost Systems 

Advantages of Cost Systems 

Application of Cost Principles 

Uniform Methods of Cost-Finding 

II Elements of Cost .^»:^, l:,».i» .... 13 

Manufacturing Costs , 

Direct Material 

Direct Labor 

Direct Expense 

Indirect Charges 

Packing Expense 

Selling Expenses 

Administrative Expenses 

Selling Price 

Deductions 

Analysis of Elements of Cost 

III General Methods of Cost-Finding. .... , ;. ..£....:«:.. 24 

Requirements of Cost-Finding 

Order Method of Cost-Finding 

Distinctive Features of Order Method 

Construction Work 

Repair Shops 

Plating Shops 

Cabinet Shops 

Garment Manufacturing Plants 

Straw and Felt Hat Plants x 

Boot and Shoe Plants 

Wood- Working Plants 

Metal-Working Plants 

Assembling Departments 

Process Method of Cost-Findino 

Distinctive Features of Process Method 
Foundries 



vi CONTENTS 

Chapter Page 

Paper Mills 

Paint and Varnish Manufacturing Plants 
Chemical Manufacturing Plants 
Rubber and Celluloid Manufacturing Plants 
Manufacture of Foodstuffs 
Coal-Mining 

Ice Manufacturing Plants 
Treating Departments 
Cutting and Machining Department — Wood-Working 

Plants 
Summary of Cost-Finding Methods 

IV Department and Product Classification ... 35 

Factory Departments 

Productive Departments 

Designation of Departmental Divisions 

Non-Productive Departments 

Miscellaneous Departments 

General Operating Expenses 

Summary of Departmental Classification 

Classification of the Product 



Part II — Factory Routine and Detailed Reports 

V Factory Orders 45 

Function of the Factory Order 

Inadequacy of Verbal Orders 

Written Factory Orders 

Kinds of Factory Orders 

Production Orders — Classification 

Designation of Quantities 

Sub-Production Orders 

The Grouping of Small Orders 

Special Production Orders 

The Production of Parts and Finished Stock 

Repairs to Product Orders 

Miscellaneous Factory Orders — Classification 

Construction Orders 

Betterment Orders 

Repair Orders 

Standing Orders 

Order Numbers 

Summary of Factory Orders 

Designing Factory Orders 

Issuance and Authorization 

Number of Copies 

Simple Form of Factory Order 

Development of Factory Order 

Filing and Final Disposition of the Factory Order 

Sales Orders 

Registering Sales Orders 



CONTENTS vii 

Chapter Page 

VI Material and Material Reports. . ..,,., 65 

Procedure in Handling Material 

Purchasing the Material 

Purchase Requisition 

Purchase Order 

Register of Purchase Orders 

Filing of Catalogues, etc. 

Receiving the Material 

Receiving Record 

Report of Material Received 

Invoices from Creditors 

Storing Material 

Bin Records • 

Record of Raw Material 

Issuance of Material 

Material Requisitions 

Bill of Material 

Credit for Material Returned 

Disposition of Issued Material 

Report of Material Used 

Interdepartmental Material Reports 

Pricing the Material 

Inventorying the Material 

Summary of Material and Material Reports 

Procedure in Handling Records 

VII Wage Systems 98 

Kinds of Wage Systems 

Day-Rate System 

Piece-Work System 

Differential-Piece-Rate Plan 

Premium and Bonus Systems 

Contract System 

Profit-Sharing and Stock-Distributing Plans 

VIII Labor Reports 108 

Classification of Labor 
Outside and Inside Labor 
Direct and Indirect Labor 
Direct Labor Reports 
Time of Reporting Labor 
Method of Reporting Labor 
Requirements of Labor Reports 
Form of Time Report 
Pay-Roll Exception Report 
Labor Transfer Reports 
Rate Records 

Summary of Labor Reports 
Procedure for Handling Reports 

IX Departmental Application of Overhead 126 

Classification 
Indirect Material 



viii CONTENTS 

Chapter Page 

1. Material Which Cannot Be Applied as a Direct 

Charge 

2. Supplies 

3. Scrap or Waste Material 

4. Small Perishable Tools and Dies 
Indirect or Non-Productive Labor 

I. (a) Cost and Idle Time of Productive Workers 

1. (b) Time of Helpers, Sweepers, Truckers 

2. Supervisors and Foremen 

3. Superintendence 

4. Inspection, When Not Considered as a Direct 

Labor Charge 

5. Factory Clerks' Salaries 

6. Employees on Defective Work 

7. Employees on Experimental Work 
Indirect Expenses 

1. Rent 

2. Insurance — Fire and Liability 

3. Taxes 

4. Interest 

5-7. Power, Light, and Heat 

8. Freight and Cartage Inward 

9. Over, Short, and Damage Account 

10. Miscellaneous Factory Expenses 

X Depreciation and Maintenance 144 

Depreciation 

Efifect of Repairs and Renewals on Depreciation 

Factors to be Considered in Fixing Rates 

Schedule of Depreciation Rates 

Basis of Standard Rates 

Group Rates 

Rates for Special Machinery 

Method of Charging off Depreciation 

Difference between Amortization and Depreciation 

Legal Definition of Depreciation and Amortization 

The Effect of Overtime on Depreciation 

Limit of Maximum Percentage for Overtime 

Abnormal Depreciation and Amortization 

Maintenance, Repairs, and Renewals 

XI Distribution of Factory Overhead , 163 

Direct and Indirect Distribution of Overhead 
General Operating Expenses 
Methods of Distributing Overhead 

1. Prime-Cost Method 

Calculation of Prime-Cost Rate 
Advantages and Disadvantage 
Conditions under which Inapplicable 

2. Productive-Labor-Cost Method 

Applicability of Labor-Cost Method 

3. Productive-Labor-Hours Method 

4. (a) Machine-Rate Methods 

Method of Compiling Machine Rate 



CONTENTS ix 

Chapter Page 

4. (b) Fixed Machine-Rate Method 

4. (c) Sold-Hour Method 

5. Miscellaneous Methods 
Fixed Versus Fluctuating Rates 
Adjustment of Factory Overhead 
Summary of Factory Overhead 

XII Factory Overhead Reports 185 

The Source of Overhead Items 

Reports for Recording Indirect Material 

Reports for Indirect Labor 

Freight and Cartage Inward 

Indirect Expenses — Fixed Charges 

Maintenance, Repairs, and Renewals 

Power Expenses 

Over, Short, and Damage 

Distribution or Analysis Record 

Deterred Expense Record 

Summary of Factory Overhead Reports 

XIII Methods of Reporting Production 198 

Purpose of a Production Report 

Form of Production Report 

Simple Production Reports 

Production Reports Showing Progress of Product 

Factory Orders as Production Reports 

Tag and Coupon System of Production Report 

Material Reports as Production Reports 

Labor Reports as Production Reports 

Defective Work Reports 

Time of Reporting Production 

Disposition of Product 

Procedure in Handling Production Reports 

Summary of Production Reports 



Part III — Compiling and Summarizing the Cost Records 

XIV Cost Sheets 211 

Scope of Cost Sheet 
The Job or Order Cost Sheet 
The Process Cost Sheet 
Information in Heading 
Details Shown on Cost Sheets 
Simple Form of Cost Sheet 
Departmental Cost Sheets 
Detailed Summary of Costs 
Progressive Cost Sheet 
Schedules of Estimated Costs 
Posting Cost Information 
Posting Material Reports 
Posting Labor Reports 



CONTENTS 



Chapter 



Entering Overhead Costs 

Entering Quantities 

Mechanical Aids for Posting Costs 

Checking Costs 

Summary of Procedure 

Method of Fihng Cost Sheets 

Summary of Method of Compiling Cost Sheets 



Pace 



XV 



Stock Records 231 

Purpose and Kind 

Method of Keeping Stock Records 

Raw Material Stock Records 

Work in Process Stock Records 

Finished Parts Stock Record 

Finished Stock Records 

Simple Types of Stock Records 

Records of Stock Available for Unfilled Orders 

Consignment Records 

Semi-Finished Goods Stock Records 

Procedure in Handling Stock Records 

Entering Inventory Balances 

Posting Charges and Credits 

Testing, Proving, and Adjusting 

Loose-Leaf Versus Bound Stock Record 

Obsolete Stock Record 

Filing Stock Records 

XVI Summarizing Records — Charging Factory Ex- 
penditures 242 

Purpose of Summarizing Records 

Cost Period 

Charging Factory Expenditures 

Method of Handling Purchase Invoices 

Purchase Record 

Posting from Purchase Record 

Accounts Payable Voucher 

Voucher Register 

Posting from Voucher Register 

Advantages and Disadvantages of Voucher Register 

Combination Voucher Register and Purchase Record 

Distribution or Analysis Record 

Summary of Material Received 

Pay-Roil 

Pay-Roil Analysis 

Analysis of Charges to Jobs 

Process Pay-Roll Summary 

Summary of Salaries 

XVII Cost Summarizing Records — Transfers Within 

THE Factory 266 

Kinds of Records 

Summary of Material Requisitions 

Summary of Departmental Material Used 



CONTENTS 



XI 



Chapter 



XVIII 



Summaries of Material Transfers 
Summary of Departmental Transfers of Labor 
Summary of Shop Order Costs 
Summary of Defective Work Costs 
Summary of Factory Overhead Distribution 
Summary of Production 

Cost Summarizing Records — Sales, Cost of Sales, 
AND Journal Entries 

Kinds of Records 

Shipping Records, Sales Records, and Costing Sales 

Sales Summary 

Cost of Sales Summary 

Return Credit Records 

Returns Summary and Cost of Returns Summary 

Costs and Sales 

Journal Entries 

Journal Vouchers and Standing Journal Entries 

Chart of Cost Summarizing Records 



Page 



276 



Part IV — Controlling the Cost Records 

XIX General Ledger Control of Factory Accounts. . . 293 
The Control of Cost Records 
Income and Expense Accounts 
Purchase Transactions 
Pay-Roll and Analysis 
Sales Transactions 
Cash Transactions 
Ledger Accounts 
Merchandise Inventory 

Controlling Factory Transactions — First Method 
Controlling Factory Transactions — Second Method 
Proving the Inventory Balances 
Subdivisions of Controlling Accounts 
Controlling Factory Transactions — Third Method 
Factory Ledger Controlling Account in the General 

Ledger 
Classification Chart of General Ledger Accounts 
Arrangement of General Ledger Accounts 

XX Factory Ledger Controlling Accounts . . ._.,., . 315 

Methods of Keeping the Factory Ledger 

Factory Journal 

Raw Material Accounts 

Postings to Raw Material Accounts 

Work in Process Accounts 

Postings to Work in Process Accounts 

Form of Work in Process Account 

Part-Finished Stock Accounts 

Postings to Part-Finished Stock Accounts 

Finished Stock Accounts 



Xll 



CONTENTS 



Chapter 



XXI 



XXII 



Postings to Finished Stock Accounts 

Productive labor Accounts 

Factory Indirect Expense Accounts' 

Distributed Overhead Account 

General Ledger Account 

Summary of Factory Ledger Controlling Accounts 

Qassification Chart of Factory Ledger Accounts 

Form of Factory Ledger 

Arrangement of Factory Ledger Accounts 

Verification of Controlling Accounts 

Adjusting Discrepancies in Cost 

Closing of Factory Ledger Accounts 



Page 



Financial and Factory Statements . . 338 

Time and Form of Preparation 

Kinds of Reports 

Reports to Executives 

Balance Sheet 

Profit and Loss Statement 

Manufacturing Statement 

Trading vStatement 

Statement of Merchandise Inventory 

Statement of Changes in Plant and Equipment 

Reports to the Sales Departments 

Statement of Salesmen's Sales, Costs and Expenses 

Statement of Production, Shipments and Inventory of 

Finished Stock 
Daily Statement of Sales and Cost of Sales 
Statement of Sales, Actual Costs and Estimated Costs 
Statement of Obsolete or Slow-Moving Finished Stock 
Reports to the Purchasing Department 
Reports to Factory Superintendent and Production 

Manager 
Statement of Costs and Production 
Statement of Labor Statistics and Cost Averages 
Statement of Obsolete Orders in Process 
Statement of Factory Expenses 
Statement of Machine Statistics 
Summary of Financial and Factory Statements 
Method of Presenting Statements 
Disposition of Statements 
Style and Ruling of Reports 
Interlocking and Agreeing Reports 
Time of Presenting Reports 

Method of Taking Inventory , 377 

Inventory Methods 

Testing the Inventory 

Inventory Adjustments 

Inventory Sheet 

Physical Inventories 

Preparation for Physical Inventory 

Instructions as to the Taking of the Inventory 

Method of Taking the Inventory 



CONTENTS 



xui 



Chapter 



XXIII 



Method of Listing the Inventory 
Method of Pricing the Inventory- 
Pricing Raw Material 
Pricing Work in Process 

Pricing Finished Parts and Finished Stock Items 
Figuring, Checking and Proving the Inventory 

Plant Asset Records 

Nature and Valuation of Plant Assets 

Plant Asset Records 

Purposes of Plant Record 

Machines 

Tools 

Fixtures 

Machine Parts 

Dies, Molds, etc. 

Records by Appraisal Companies 



Page 



391 



Part V— The Installation of a Cost System 

XXIV General Considerations 399 

The Cost Accountant 

Work of the Cost Accountant 

Cost Classification of Enterprises 

Internal Problems Affecting Cost Installations 

Fitting the Cost System to Existing Conditions 

Red Tape 

Reports for Executives 

Summary of Cost Procedure 

1. Charging the Factory 

2. Receiving and Storing Material 

3. Proving and Charging Pay-RoUs 

4. Delivering Material to Operation 

5. Computing Costs 

6. Crediting Production 

7. Distributing the Factory Overhead 

8. Charging Production to Stock 

9. Costing Sales and Shipments 

10. Preparing and Posting the Summarizing Records 

11. Proving Subsidiary Records 

12. Preparing and Proving the Trial Balance 

13. Preparing Factory and Financial Statements 
Cost Systems 

Forms for Cost Records and Reports 
Presenting Report on Cost Systems 

XXV Installing a Cost System — Examination of Plant 414 
Nature of Examination 
Elxamination of an Existing Cost System 
Efficiency Details 

Procedure for Examination of a Plant 
I. Product Classification 



XIV 



CONTENTS 



CUAPTEB 



Page 



2. Sales Department 

3. Departments of the Factory and Manufacturing 

Processes 

4. Foundry Department 

5. Plating Room 

6. Wood-Working Shops 

7. Dry Kilns 

8. Power Department 

9. Packing Department 
ic. Shipping Department 

11. Estimating Department 

12. Cost Department 

13. Factory Orders 

14. Raw Material and Storeroom Requirements 

15. Purchasing Division 

16. Receiving Department 

17. Storeroom 

18. Labor and Labor Reports in Use 

19. Factory Overhead Items 

20. Production 

21. Finished Parts and Finished Stock 

22. Compiling the Costs 

23. Cost Summarizing Records 

24. Genera Accounting Records of Original Entry 

25. General System of Accounting 

26. Statements 

27. Miscellaneous Information 
Examination of Auxiliary Mechanisms 
Method of Obtaining the Information 

XXVI Installing a Cost System — Method of Starting 

Operations . . 442 

Preliminary Test of Records 

Order of Procedure 

Qassifying and Reanalyzing the Beginning Inventory 

Entering Inventory on Records 

Proof of Entries 

Handling Work in Process Items 

Starting New Orders in the Factory 

Overhead Distribution 

Classification of Product, Departments and Accounts 

Reports and Records 

Part VI — Simplified Cost-Finding Methods 

XXVII Elementary Cost Systems 451 

Valuation of Closing Inventory 
Method of Preparing Statements 
Advantage of Percentage Method 
Percentage Method Applied to Several Product Clas- 
sifications 
Unit Method of Figuring Costs 
Applicability of Unit Method 
Proof of Records 



CONTENTS XV 

Chapter Page 
XXVLU Estimating Cost Systems 459 

Special Features of Estimating Method 
Method of Operating System 
Summary of Procedure 
Development of System 

Verification of Total Costs — First Methcx) 

Special Records Required 
General Ledger Accounts 
Method of Verification 

Verification of Material, Labor and Overhead 
Estimates — Second Method 

Special Records Required 
Analysis of Inventory 
Operation of Ledger Accounts 
Method of Verification 

Verification of Costs by Several Lots or Groups 
— Third Method 

Special Records Required 

Raw Materials Costs 

Labor Costs 

Overhead Costs 

Opening Inventory Analysis 

Operation of Ledger Accounts 

Method of Verification 

Verification of Costs by Operating Departments 
— Fourth Method 

Special Forms Required 

Ledger Accounts Opened 

Charges for Expenditures 

Crediting Production 

Recording Cost of Sales 

Method of Verification 

Adjusting Differences in Inventory 

XXIX Uniform Cost Methods , 481 

The Advantages of Standard Methods 
Examples of Haphazard Methods 
Method of Standardizing Costs 
Details to be Considered 

Part VII— Cost-Plus Contracts 

XXX Recommendations of Interdepartmental Cost 

Conference , 487 

Work of Conference 
Recommendations — Their Object 
Fair Terms and Fixed Prices 
Form of Purchase-and-Sale Contract 



XVI 



CONTENTS 



Chapte* 



Page 



XXXI 



Relations Established by Contract 
Fixed Profit Plan 
Adjustment of Fixed Profit 
Standardized Forms and Methods 
Summary of Recommendations 
Normal Costs versus Total Costs 

CosT-Pi.us Contracts — Material, Labor, and 
Equipment Items 

General Consideration of Terms of Contract 
Need of Special Rulings 

Betterments and Equipment 

Treatment of Additions and Special Facilities 

Treatment of Fixtures and Special Equipment 

Office Furniture and Fittings 

Rebuilding, Renovating and Equipment Charges 

Freight or Express on Equipment 

Setting Up Machines 

Monorail System 

Installing Workmen's Washing Facilities 

Housing of Laborers 

Repairs, Renewals and Replacements 

Method of Treatment 
Extraordinary Repairs 

Materials and Sin>PLiES IiXMS 

Material Cost 

Supplies 

Pricing of Material and Supplies 

Shortages, Overs and Obsolete Material 

Inventory Adjustments 

Dray age 

Packing and Packing Supplies 

Transfers of Inventory Items Between Factories 

Spare Parts 

Tools 

Distinction Between Tools and Machines 

Asset Tools and Perishable Tools 

Scrap Value of Tools 

Classification of Tools 

Handling and Storing of Tools 

Accounting for Tools 

Asset Tools Charged at Cost 

Perishable Tools 

Old Tools Remade or Salvaged 

Repairs or Replacement of Tools 

Identification of Tools Used 

Treatment When Basis of Contract is Changed 



496 



CONTENTS 



xvii 



Chapter 



Page 



Overtime and Idle Time 

Overtime 

Idle Time on Operation 

Waiting Time as a Deferred Charge 

XXXII Cost-Plus Contracts — Expense and Overhead 

Items 516 

Distribution of Overhead 

Direct and Indirect Distribution 

Distribution Over Periods of Less Than a Month 

Overhead on Bulk Products 

Deferred Overhead Charges 

Preliminary Expenses 
Deferred Expenditures 

Administrative Expenses 

Method of Treatment 

Excessive Salaries 

Salaries Paid After Termination of Employment 

Bonus and Pension Payments 

Bonus Payments 

Pension or Compensation Indemnities 

Insurance and Taxes 

Fire Insurance 

Insurance Other Than Fire 

Liability Insurance 

Premiums for Life Insurance 

Income and War Excess Profits Taxes 

Government Taxes on Freight 

Interest, Depreciation and Depletion 

Interest as a Cost 

Interest on Borrowed Money 

Interest on Working Capital 

Inventories 

Interest on Plant, Machinery and Equipment 

Depreciation and Interest on Plant Assets 

Depletion 

Method of Figuring Depreciation 

Guarding of Property 
Police Protection 
Guard House 

Guards' Uniforms, Badges and Other Equipment 
Distribution of Protection Charges 

Miscellaneous Expense Items 

Blue-Prints 
Cash Discount 



XVlll 



CONTENTS 



Chapter 



XXXIII 



Drafting Expenses 

Defective Work 

Experimental Expense 

Employment Department 

Intercompany Expenses 

Patents and Royalty 

Rental — Specific Charge for Same 

Scrap and Waste 

Selling Expense 

Testing Expense 

Training Employees Expense 

Welfare Work 

Erkors and Losses Due to Changes 

Reclamation of Errors 
Changes in Specifications 

Items Not Chargeable Unless Strictly Applicable 

Attorney Fees 

Bad Debts 

Brokerage Expenses 

Donations and Entertainment 

Real Estate Investments, Expenditures, etc. 

Reserves 

Engagement of Expert Services 

Suspension or Cancellation of Contracts . 

General Considerations 

Cancellation of Fixed Price Contracts 

Valuation of Inventory 

Settlement of Commitments 

Amortization 

Plant Rearrangment 

Experimental Work 

Special Tools 

Lease of Grounds or Building 

Occupancy 

Contract for Service 

Organization Expense 

Profits 

Saving Clause in Contract 

Cancellation of Fixed Profit Contracts 

Difference Between Fixed Price and Fixed Profit 

Contracts 
Saving Clause 

Cancellation of Cost-Plus Contracts 

Distinction Between Fixed Profit and Cost-Plus 
Contract 



Page 



540 



FORMS AND CHARTS 



Elements of Cost 

Form Page 

1. Diagram Showing Relation of Cost Elements to Selling Price . 20 

2. Chart Showing Analysis of Cost Elements 22 

General Methods of Cost-Finding 

3. Chart Showing Methods of Cost-Finding Applied to Various 

Industries 33 - 

4. Qassification Chart of Factory Departments 41 

Factory Orders 

5. Classification Chart of Factory Orders 56 

6. Simple Factory Order 58 

7. Sales Order 62 

Material and AIaterial Reports 

8. Purchase Requisition 66 

9. Purchase Order 69 

10. Register of Purchase Orders 71 

11. Receiving Record 73 

12. Report of Material Received 75 

13. Invoice Stamp 77 

14. Bin Record 78 

15. Record of Raw Material 79 

16. Material Requisition 83 

17. Bill of Alaterial 85 

18. Credit for Material Returned to Stock 87 

19. Report of Material Used 89 

20. Interdepartmental Alaterial Report 90 

21. Inventory Test 93 

22. Inventory Sheet 94 

23. Chart Showing Handling of Material and Material Reports . 96 

Labor Reports 

24. Daily Labor Report 114 

25. Daily Piece-Work Report 115 

26. Job Ticket 116 

27. Pay-Roil Exception Report 117 

28. Labor Transfer Report 119 

29. Wage Rate Record 120 

30. Classification Chart of Labor Reports 121 

xix 



XX FORMS AND CHARTS 

Form Page 

Factory Overhead Reports 

31. Gassification Chart of Factory Overhead 183 

32. Schedule of Fixed Charges 191 

33. Power Plant Distribution Record 194 

34. Classification of Factory Overhead Reports 197 

Production Reports 

35. Daily Production Report — Simple Form 199 

36. Defective Work Report 205 

37. Classification Chart of Production Reports 208 

Cost Sheets 

38. Process Cost Sheet 213 

39. Cost Tag 216 

40. Departmental Total Cost Sheet 2i6 

41. Individual Departmental Cost Sheet 217 

42. Complete Cost Sheet, Giving Departmental Details . . 219, 220 

43. Progressive Cost Sheet 222 

44. Calculation Blank Used in Garment Factory 223 

45. Classification Chart of Cost Sheets 229 

Stock Records 

46. Finished Stock Record 235 

47. Finished Product or Parts Stock Record 236 

48. Finished Product Stock Record, Showing Filled and Unfilled 

Orders 237 

Summarizing Records 

49. Invoice Stamp, Covering Data for Purchase Record .... 244 

50. Purchase Record 246 

51. Accounts Payable Voucher 247, 248 

52. Voucher Register 252, 253 

53. Distribution or Analysis Record 256 

54. Summary of Material Received 258 

55. Pay-Roll Record 260 

56. Pay-Roll Analysis 263 

57. Summary of Material Requisitions 267 

58. Summary of Shop Order Costs 271 

59. Summary of Factory Overhead 273 

60. Summary of Production 274 

61. Shipping Order 277 

62. Shipping Order Combined with Customer's Invoice. Sales 

Record and Cost of Sales Record 278, 279 

63. Sales Summary 282 

64. Cost of Returns Record Combined with Customer's Credit 

Memo and Office Record Memo 284, 285 

65. Register of Sales and Costs 287 

66. Journal Voucher 289 

67. Standing Journal Entries Form 290 

68. Chart of Cost Summarizing Records and Procedure .... 291 



FORMS AND CHARTS Xxi 

Form Page 

Controlling Accounts 

Qassification Chart of General Ledger Accounts . . . 312, 313 

Work in Process Account 321 

Work in Process Account Showing Elements of Cost . . . 321 

Factory Indirect Expense Account for Each Item .... 326 

Factory Indirect Expense Account for Each Department . . 326 

Summary Chart of Factory Ledger Controlling Accounts . . 330 



Classification Chart of Factory Ledger Accounts . . . 323, 233 

Financial and Factory Statements 

76. Comparative Balance Sheet 34i 

77. Profit and Loss Statement 344. 345 

78. Manufacturing Statement 347 

79. Comparative Statement of Merchandise Inventory .... 350 

80. Statement of Charges in Plant and Equipment .... 351 

81. Statement of Salesmen's Sales, Costs and Expenses .... 354 

82. Statement of Production, Shipments and Inventory of Finished 

Stock 356 

83. Daily Statement of Sales and Cost of Sales 357 

84. Statement of Sales, Showing Profit or Loss on Special Items 358 

85. Statement of Sales, Actual Costs and Estimated Costs . . . 360 

86. Statement of Obsolete or Slow-Moving Stock 361 

87. Statement of Merchandise Purchases and Inventory of Raw 

Materials 363 

88. Statement of Obsolete Raw Material Items 364 

89. Comparative Statement of Maximum and Minimum and Actual 

Quantities 365 

90. Statement of Costs and Production 367 

91. Statement of Labor Costs and Averages 369 

92. Statement of Obsolete or Slow-Moving Orders in Process . . 370 

93. Statement of Factory Expenses 371 

94. Statement of Machine Costs 372 

95. Chart of Financial and Factory Statements 374 

Inventory Records 

96. Work in Process Inventory Sheet 380 

97. Inventory Tag 385 

98. Plant Asset Record 392, 393 

Estimating Costs 

99. Schedule of Total Estimated Costs 463 

100. Summary of Estimated Costs of Sales ........ 464 

loi. Analysis of Inventory . 467 

Cost-Plus Contracts 

102. Record of Tools Issued, Used and Scrapped SH 



COST ACCOUNTING 

Part I — Elements and Methods of Cost- Finding 



CHAPTER I 

COST-FINDING AND ITS FUNCTIONS 

Changing Social and Industrial Demands 

The importance of efficiency in business organization has 
never been so generally recognized as at the present time, and 
there is promise of even greater development in the future. 
One indication of this condition is the increased volume of 
literature that is now available on the subject. More than 
90% of this literature has been published in the last decade, 
and fully 75% in the last five years. 

The ultimate causes of this are to be found in the broad 
field of economics. The gradual absorption and development 
of natural resources, the exploitation of new fields of com- 
merce, the increase of population, the higher standards of 
living, the greater complexities of demands in modern life — 
these are but a few of the innumerable influences reflected in 
the industrial life of today. 

Transformed to some extent, these changes meet the 
manufacturer in the form of demands for more wages and 
better labor conditions, in the increased cost of materials, and 
in a much keener competition in every phase of manufacturing 
and selling. He must either adapt his methods to meet the 
situation, or retire from the field. Only one practicable road 
lies before him, and that is a keener realization of the existing 



2 COST-FINDING ELEMENTS AND METHODS 

possibilities in his business. To be specific, he must ehminate 
waste of every kind and plan his organization so as to increase 
the production per unit of cost. 

Phases of Efficiency Progress 

This search for factory efficiency assumes many phases 
which overlap each other, more or less. From the mechanical 
standpoint, it involves a study of plant location and construc- 
tion, new and better types of machines, economies in producing 
and using power, etc. From the labor standpoint, it has given 
rise to new and improved methods of wage payment, such as 
the differential rate plan and the premium and bonus methods 
with their various modifications, all of which offer increased 
pay for greater individual effort and efficiency. Even the 
motions and operations of the workmen are being analyzed as 
to their component parts, with the view of eliminating those 
which are unessential and wasteful of effort. While some 
of these methods are still novelties, the time is not far distant 
when most manufacturers will have to adopt them, or some- 
thing similar, for their own salvation. 

From the standpoint of factory organization, more has 
been attempted and accomplished than in almost any other 
direction, because the need has been pressing and immediate. 
The purpose is to bring the activities of the whole plant, no 
matter how widespread, under the direct review and control 
of the management. It is felt, and rightly so, that a con- 
siderable loss is incurred unless efficient systems and reliable 
statistics enable the management to keep in touch with the 
various steps of production, and to locate the responsibility for 
waste, lost time, shop errors, etc. 

Quite as essential in its bearing on efficiency is the proc- 
ess of cost-finding; that is, finding just what it costs to manu- 
facture a certain order or article. Not only is this necessary 
for the purpose of determining possible selling prices, but it 



COST-FINDING AND ITS FUNCTIONS 3 

provides the ultimate measure by which manufacturing 
methods may be compared, and the best be thereby deter- 
mined. 

Importance of Cost-Finding 

Through the Sherman Act, the United States Government 
prohibited manufacturers from agreeing on a uniform selling 
price. While this was a justifiable law and was necessary in 
order to curb combinations, at the same time it produced a 
certain amount of chaos because of the constant cutting of 
prices. There is, however, no law to prevent the introduction 
of a cost system or a uniform method of cost as applied to a 
certain definite industry, and the importance of this has re- 
cently been strongly emphasized by the government. The 
Federal Trade Commission, through the untiring efforts of its 
former chairman, Hon. Edward N. Hurley, in its work in con- 
nection with cost-finding, made a deep impression on the minds 
of manufacturers throughout the country as to the advantage 
and necessity of this branch of accounting. 

Government investigations show that out of a quarter of 
a million business corporations in this country, the majority 
are making no profit, and that over 70% are making 
less than the salary of a good executive; furthermore, these 
statistics show that only 5% of the manufacturers know 
what their goods cost them to make. This statement does 
not mean that the manufacturer does not figure his cost, for 
every manufacturer, no matter how crudely it may be done, 
must do some sort of figuring on his cost in order to arrive 
at a selling price. The trouble, in the majority of cases, is 
that the manufacturer has no systematic method of figuring 
costs and has no way of proving his cost estimates after he has 
made them. 

The need for better methods of cost accounting has been 
justified by the confusion which the government found exist- 



4 COST-FINDING ELEMENTS AND METHODS 

ing at the outbreak of war in many of the trades in connec- 
tion with this matter. It was necessary in case after case to 
estabhsh, at an immense expense, a bureau and corps of ex- 
perts to endeavor to find out the cost of manufactured products. 
All this trouble, waste of time, and expense would have been 
saved for the government, and much for the manufacturer as 
well, had there been proper methods of cost accounting in 
operation. 

The war is over and the country at the present time is 
in a very prosperous state. A huge program of reconstruc- 
tion along industrial and economic lines must take place. As 
stated by the Canadian Minister of Trade and Commerce: 
"The world is about to plunge into a trade and economic con- 
test in which forces will assume totally new alignments ; when 
competition \\n\\ be keener and stronger than ever, and when 
science and organization will play a part in every successful 
role." The introduction of correct cost methods, backed by 
a sound organization, wnll enable the manufacturer to be pre- 
pared to meet his problems and to solve them intelligently 
when the time comes. 

Functions of Cost Accounting 

While the present book treats primarily of cost account- 
ing, it would be a mistake if its scope were limited to finding 
costs only. Any good cost system, properly operated, per- 
forms two distinct though related functions : 

The first, which may be called the direct function, is that 
of ascertaining actual costs. This should always be supple- 
mented by the second, or indirect function — that of supplying, 
in its system of reports, the information necessary to organize 
the many departments of a factory into working units. In 
addition to this, it enables the activities of these units to be 
directed in accord with some definite plan designed to eliminate 
the inefficiencies in the various departments of the business. 



COST-FINDING AND ITS FUNCTIONS 5 

Cost Accounting as Related to General Accounting 

Cost accounting, as a science, is a branch of general ac- 
counting. Its province is to analyze and record the cost of 
the various items of material, labor, and indirect expense in- 
curred in the operation of a factory, and so to compile these 
elements as to show the total production cost of a particular 
piece of work. With the cost books once established, the 
best modern usage is to incorporate their record in total in the 
general financial books. In this way the modern cost system 
builds up an interlocking series of accounts which furnish the 
basis for a detailed study of the operations of a manufacturing 
business. 

The accounts which appear in the cost books, however, 
differ in nature and scope from those in the general financial 
books. The latter exhibit the complete record of the financial 
and commercial transactions of a business, whereas the 
former treat only of those transactions which deal with, and 
are properly chargeable to, the manufacture of the product. 
Like the general books, the cost records show the amounts 
spent for material, supplies, labor, and indirect expenses ; but, 
in addition, there appear accounts with the raw material classi- 
fications, accounts with various operating departments, and 
accounts with the classifications of the finished and partly 
finished product. The last named accounts are those which 
make an analysis of costs possible. 

Objections to Cost Systems 

Arguments against cost systems have been presented so 
often that perhaps it may prove advantageous to review some 
of these so-called objections. They may be summarized under 
the five headings which follow : 

I. Unique Business. The commonest objection set forth 
by a manufacturer who opposes cost systems is that his busi- 
ness is entirely distinctive, and that a cost system is absolutely 



6 COST-FINDING ELEMENTS AND METHODS 

impracticable in so far as his particular industry is concerned. 
Of course, there may be a few exceptional industries where it 
is impossible to operate successfully a complete cost system 
with all of its ramifications. Some practical cost system, how- 
ever, can be installed in every manufacturing industry. It 
may be that the most improved methods could not be installed 
in their complete form, but some of these advanced methods 
can be installed and can be made thoroughly practicable. 

2. Cost of Installation. Cost systems are objected to on 
account of the excessive cost of their installation. This should 
be considered in the same way as any other investment — that 
is, the amount paid for the system should not be regarded 
alone, but its cost should also be considered in connection 
with the income-producing power of the system. "What is 
the system worth as a producer of profit?" is a far more im- 
portant question than, *'What did the system cost?" 

3. Cost of Operation. In reviewing the objection that 
the cost of operating the system is excessive, consideration 
must again be given to the value of the system as a producer 
of income. If the advantages derived from the operation of 
the system do not compensate the manufacturer — that is, if 
it does not save more money than is paid for clerk hire, sta- 
tionery, and other expenses incidental to its operation — the 
cost system either is a poor one or is not serving its entire 
purpose. Cost systems cannot be operated successfully with- 
out brains, and if the infor.nation disclosed by the reports of 
the advanced cost systems of today is not used in an efficient 
manner, the cost system is not serving its purpose as a "pro- 
ducer of profits." 

4. Red Tape. The accusation that a cost system is al- 
ways tied up with "red tape" is often made without being 
proved. What is meant by the term "red tape" depends to 
some extent upon the workings of the mind of the person 
using that expression. It may represent a violent prejudice 



COST-FINDING AND ITS FUNCTIONS 7 

against cost-finding in general or against the number and 
kinds of forms and records which are necessary in the opera- 
tion of the cost system and which the uninitiated regard as 
more or less superfluous. 

As a matter of fact, most cost systems which have been 
properly planned and which are operated efficiently provide for 
numerous "short cuts" in summarizing the information for 
accounting purposes. Mechanical devices as an aid in the 
operation of cost systems have practically eliminated the so- 
called "red tape." 

5. Failure of Numerous Cost Systems. It is a matter of 
record that a cost system frequently fails to give the results 
expected from its operation. The test of success or failure 
lies in the fact that it is or is not serving all of its functions, 
which include ascertaining true and accurate costs to be used 
as a basis for correcting irregularities and thereby "producing 
profits." 

Numerous facts which may explain the failure in some 
instances of cost systems may be cited. These include : 

(a) Impracticable system. 

(b) Practicable system, improperly installed. 

(c) Management not in sympathy with the work of 

systematizer. 

(d) Opposition or lack of co-operation on the part of 

employees. 

These are not to be considered as excuses for the failure 
of cost systems. They include only recorded facts which 
have accounted for failures. As a word of caution, therefore, 
it may be said that, before devising or installing a cost system, 
it is absolutely essential to secure the active support of the 
management so that all "kinks" may be overcome and all dis- 
senters eliminated. Systems cannot be successful if they are 
installed against the wishes of the management. 



8 COST-FINDING ELEMENTS AND METHODS 

Advantages of Cost Systems 

The advantages of cost systems, with respect to increas- 
ing the efficiency of a plant from an organization standpoint, 
may be summarized under the following six headings : 

1. Perpetual Inventory. The cost records provide for a 
perpetual inventory which furnishes information for the prep- 
aration of monthly statements showing the industrial and 
financial condition and the operating results of a company. 
These monthly statements should include : 

(a) Balance sheet showing the financial condition of the 

company at the end of each month. 

(b) Profit and loss statement showing the financial 

operations of the company during the month. 

(c) Manufacturing statement, or statement of factory 

expenditures, showing the financial operations of 
the various departments of the factory during 
the month. 

(d) Statement of salesmen's sales and costs showing 

the profit or loss of each salesman or territory of 
the country for the month. 

2. Prices and Policy Data. The costs of each article, 
class of product, or operation being separately shown, the 
management has the necessary data at hand to guide it in 
making changes of policy or methods, these including: 

(a) Establishing correct selling prices with the true 

costs as the basis. 

(b) Eliminating the manufacture of any articles which 

show losses, and substituting for these more 
profitable articles. 

(c) Increasing the efficiency of the salesmen by enabling 

them to concentrate their efforts and energies on 
the more profitable articles. 



COST-FINDING AND ITS FUNCTIONS 9 

(d) Establishing correct rates of commission for sales- 
men upon the various classes of product. 

3. Comparative Costs. Costs for different periods and 
under different conditions are obtainable, enabling the follow- 
ing comparisons to be made : 

(a) A comparison of each article, job, or operation cost 

with standard, estimated, predetermined, or pre- 
vious costs. 

(b) A comparison of article, job, or operation cost 

under various methods of manufacturing, as for 
instance, bench work with machine work, day- 
work with piece-work, piece-work with premium 
or bonus work, etc. 

(c) A comparison of article, job, or operation cost with 

outside prices under the various market condi- 
tions, thus ascertaining when parts or operations 
may be purchased or manufactured outside at a 
lower cost than the particular cost shown in the 
plant. 

4. Detection of Inefficiencies. The records provide for 
following the material from the raw state until it becomes 
finished product, and for ascertaining the time, labor, and ex- 
pense involved in its manufacture. In this way, the following 
inefficiencies may be detected : 

(a) Losses of material 

(b) Wasted time 

(c) Defective work 

(d) Poor supervision 

(e) Various other "leaks" 

5. Detailed Inventories. A cost system provides for 
keeping perpetual inventory records in detail of raw material, 
work in process, finished parts stock, and finished stock. 



10 COST-FINDING ELEMENTS AND METHODS 

These records provide a means for discovering or deter- 
mining : 

(a) Losses of material. 

(b) Obsolete stock. 

(c) Insurance requirements for the merchandise in the 

various departments of the plant. 

(d) Information for the purchasing department as to 

the quantities of materials on hand and the 
necessary requirements. 

(e) The correct quantities of product which must be 

manufactured in order to maintain stock require- 
ments. 

(f) Information for the sales department as to deliver- 

ies on orders. 
6. Standardization Data. A cost system supplies the in- 
formation necessary for standardizing the work of a plant, 
which might include : 

(a) Ascertaining the unit of production upon which the 

various departments of the plant may operate 
efficiently, thereby keeping the various operating 
departments balanced with each other. 

(b) Changing day-work operations to piece-work opera- 

tions, or perhaps to the premium or bonus system 
of paying wages. 

(c) Establishing a basis for a planning or routing sys- 

tem of orders in the various departments. 
These six advantages are not to be regarded as a brief for 
the value of cost systems, but rather as an analysis showing 
the lines along which a cost system influences the business or- 
ganization. 

Application of Cost Principles 

The principles underlying cost-finding have all oeen anal- 
yzed and defined, but when it comes to the actual installation 



COST-FINDING AND ITS FUNCTIONS u 

of cost systems, the greatest skill and caution must be observed 
in applying these principles to the conditions that exist. No 
two manufacturing plants are alike, even in the same line of 
business. Every plant has peculiarities that bear upon the 
methods of cost-finding, and this makes each factory a problem 
in itself. It follows that in either writing or reading a treatise 
on the subject, this distinction must be clearly conceived. The 
knowledge of principles, without a corresponding familiarity 
with the facts and conditions of manufacturing, produces the 
theoretical cost-finder, who is frequently a nuisance. On the 
other hand, it is only the shallow thinker who trusts to a 
superficial study of forms and accounting practices, with the 
idea that such knowledge prepares him to go into any business 
and install a cost system. To attain success in cost work, one 
must understand the principles of cost accounting and be 
familiar with the conditions which actually exist, and must 
apply the principles so as to fit these conditions. 

Uniform Methods of Cost-Finding 

In almost every line of manufacturing industry trade asso- 
ciations have been formed, and during the last ten years great 
progress has been made through these trade associations along 
efficiency lines in buying, in manufacturing, and in extending 
trade. Furthermore, a valuable end has been served in pro- 
moting cordial and sympathetic relations among the various 
members of the associations. By means of these trade asso- 
ciations, the fact has been proved that while competition is 
beneficial, at the present time manufacturers can accomplish 
much more lasting results by assisting each other in their 
problems than by conducting a continuous trade warfare 
among themselves. 

Out of the work of the trade associations has grown the 
idea of uniformity of cost-finding methods. In this connec- 
tion, the expression "uniform cost system" has been used fre- 



12 COST-FINDING ELEMENTS AND METHODS 

quently and has caused considerable misunderstanding on the 
part of manufacturers. A uniform cost system, even as 
apphed to a particular line of industry, is impracticable if not 
impossible, and manufacturers are fully conversant with this 
fact. The proper phrase to use is "uniform methods of cost- 
finding." This means outlining the standard principles of cost 
accounting and, from these principles, arriving at uniform 
methods of treating costs as applied to a particular industry. 
An illustration of this matter may be given in connection with 
the manufacture of hosiery. Some plants buy their yarn, 
others manufacture it; some send out their goods to be dyed, 
others do their own dyeing; some manufacture cotton goods, 
others woolen goods. While a uniform system could not be 
applied, uniform methods may be established in the various 
plants according to their peculiar conditions. 

The greatest advantage to be derived from uniform cost 
methods is that of insuring a more uniform selling price. This 
object would be attained, even if the uniform system were not 
as scientific as it should be; for if errors were made through 
the method established, all manufacturers would at least be 
figuring the same way, all would be making the same mistakes, 
and unfair and ignorant competition would be eliminated. No 
one questions the old adage that competition is the life of trade, 
but the majority of manufacturers know also that unfair com- 
petition is the curse of trade. No one should dread fair com- 
petition, for success will then depend on his own organization. 
If a manufacturer cannot make money in competition with 
other concerns when using the same methods of figuring costs, 
he can only conclude that his goods or his marketing, or both 
of them, are costing him too much. His next step, naturally, 
is to analyze closely the methods and conditions under which 
he is manufacturing and marketing his product, until he finds 
and corrects the inefficiencies which are handicapping him so 
seriouslv. 



CHAPTER II 

ELEMENTS OF COST 

Manufacturing Costs 

Material, labor, and expense are the three subdivisions of 
manufacturing costs which are known as the elements of costs. 
These elements may be grouped under the two following 
headings : 

1. Direct charges 

2. Indirect charges 

Direct charges consist of those elements of costs which, 
entering into and forming part of a product, can be charged 
directly to the product. These direct charges, therefore, in- 
clude : 

1. Direct material 

2. Direct labor 

3. Direct expense 

All elements of costs which are not chargeable directly 
to the product fall under the heading of indirect charges and 
include : 

1. Indirect material 

2. Indirect labor 

3. Indirect expense 

Direct Material 

The cost of the substance or substances from which a 
product is made, is the direct material charge. In manufac- 
turing industries, often the direct material charge includes 
several different kinds of material. For example, in a wood- 

13 



14 COST-FINDING ELEMENTS AND METHODS 

working plant, lumber, hinges, knobs, locks, paints, oils, and 
varnishes may all be used in the construction of the articles 
manufactured, and therefore, the direct material cost would 
include all these items. Direct material should be charged 
either to : 

1. Some definite job, order, or article 

2. Some definite manufacturing process 

How-ever, often an item by its very nature may be a di ect 
material cost but, from a practical standpoint, canno^. be 
charged directly to the product and therefore is included, as 
indirect material, among the indirect factory expenses. For 
example, nails and screws are often included among the in- 
direct factory expenses in wood-working plants because it is 
impracticable to charge these items directly to the cost of a 
particular job, order, or article. 

Also, in a straws hat factory, the materials that enter 
directly into the manufacture of the hat are braid or straw, the 
band, the sweat, the trimmings, and the thread. From a tech- 
nical standpoint, this thread is just as much a direct material 
charge as the band or trimmings, but it would cost as much 
to find out the amount used in the manfacture of a dozen hats 
as the thread itself costs. It is, therefore, usually handled as 
an indirect factory expense item in the sewing department and 
is distributed and charged to the various hats on the basis of 
the number of hats produced. This is a good illustration of 
applying common-sense instead of theory, which is so neces- 
sary at times in cost-finding. 

On the other hand, certain expense items are often in- 
cluded as a part of the direct material charge. For instance, 
when material is purchased in foreign markets, the amount of 
duty and import expenses should be added to the foreign cost 
of the material in order to ascertain the "landed cost" or 
direct material charge. Also, it is often found to be quite 



ELEMENTS OF COST 15 

feasible to add the incoming freight, express, and cartage cost 
directly to the invoice cost of material; the direct material 
charge then including the material cost plus cost of the incom- 
ing freight, express, and cartage. 

Direct Labor 

That portion of the factory wages which is productive in 
character and which may.be applied directly to the product or 
to the manufacturing process, is the direct labor charge and is 
often termed the productive labor charge. Direct labor should 
be charged either to : 

1. Some definite job, order, or article 

2. Some definite manufacturing process 

In manufacturing industries, the direct labor charge is 
generally subdivided into various different kinds of operations. 
For example, in a garment industry the direct labor charge 
would include the following operations : 

1. Cutting 

2. Trimming 

3. Hand sewing 

4. Machine sewing 

5. Ribboning 

6. Inspecting 

7. Pressing 

8. Boxing 

Direct Expense 

Any other expense which is applicable and which may be 
charged directly to a job, order, or article, is included as a 
direct expense charge. Such expenses are not infrequent, an 
example being the transportation and hotel expenses of fore- 
men and workmen engaged on out-of-town special construction 
orders. Experimental work on special orders is often included 
in the costs under the caption "direct expense," although items 



t6 COST-FINDING ELEMENTS AND METHODS 

of this character are more frequently considered part of the 
factory indirect expenses and distributed over the entire prod- 
uct manufactured. 

Indirect Charges 

Indirect charges include indirect material, indirect labor, 
and indirect expenses. These indirect charges are often 
termed "factory overhead," "indirect factory expenses," 
"manufacturing expenses," "burden,'' or "oncost." Indirect 
charges as a class may be analyzed under the two following 
headings, depending upon the application and distribution of 
the items composing them and the methods of apportioning 
and distributing them to job, order, or article, or to the manu- 
facturing process : 

1. Departmental expenses, which include those expenses 

chargeable to definite departments of the factory 
because they are incurred in these definite depart- 
ments. 

2. General operating expenses, which include those ex- 

penses chargeable either over the entire plant or 
over more than one department of the plant. 

The items composing the indirect charges will necessarily 
vary in almost every factory, but the following classified Hst 
includes certain items which invariably appear among the in- 
direct charges of a plant: 

I. Indirect Material : 

Direct material which cannot be applied in a direct 
manner 

Supplies 

Scrap material 

Small tools 
?.. Indirect Labor : 

Indirect or non-productive labor 



ELEMENTS OF COST 17 

Supervision or foremanship 

Superintendence 

Inspection, when not considered as a direct labor 

charge 
Factory clerl<s' salaries 
Defective work 
Experimental work, when not considered as a 

direct labor charge 
3. Indirect Expenses: 
Rent 

Insurance — fire and liability 
Taxes 
Interest 
Depreciation 

Maintenance, repairs, and renewals 
Power 
Light 
Heat 
Freight and cartage inward, when not considered 

as a part of the direct material charge 
Over, short, and damage 
Miscellaneous factory expenses 

Packing Expense 

The cost of production, or the factory cost, ends when 
the article is finished and ready for sale. Therefore, the fac- 
tory costs include the direct material, direct or productive 
labor, direct expense, if any, and the indirect charges. In 
some instances, a portion of the packing expense is included 
as part of the factory cost. When the finished articles are 
packed uniformly and stored in the finished stock warehouses, 
the packing department, in such an instance, may be included 
as a factory department and its costs considered part of the 
factory cost. 



1 8 COST-FINDING ELEMENTS AND METHODS 

Selling Expenses 

The items which are generally included among the selling 
expenses are the following: 

Advertising or advertising department expenses 

Sample expenses 

Commissions 

Salesmen's salaries 

Salesmen's expenses 

Traveling expenses 

Sales office expenses: 

Rent 

Clerks' salaries 

Telephone and telegraph 

Printing and stationery 

Postage 

Miscellaneous expenses 
Freight and cartage outward 

Shipping department expenses and finished stock ware- 
house expenses may also form a part of the selling expenses. 
The selling expenses have no direct bearing upon the produc- 
tion or factory costs of the article, but provision must be 
made to cover them when determining the price for which 
the article will sell. 

Administrative Expenses 

The segregation of the administrative expenses as a dis- 
tinct group is sometimes a difficult matter. In the majority of 
cases the time of the administrative force is spent in super- 
vising the selling organizations, in solving factory problems of 
production and labor conditions, and in looking after the 
finances of the business. Therefore, administrative expenses 
often are partly production or factory costs and partly selling 
p.nd administrative costs, and it is necessary to make an arbi- 



ELEMENTS OF COST 



19 



trary distribution of them so that the factory and sales depart- 
ments will be charged with proportionate amounts. In any 
event, before determining the selling price of the article, pro- 
vision must be made for covering these administrative ex- 
penses. 

The following items are generally included among the ad- 
ministrative expenses : 

Officers' salaries 
Executives' expenses 
Auditing expenses 
Legal expenses 
Administrative office expenses: 

Salaries 

Rent 

Light and heat 

Telephone and telegraph 

Printing and Stationery 

Postage 

Office supplies 

Miscellaneous expenses 

Selling Price 

Before determining the selling price of an article con- 
sideration must be given to the various elements of costs and 
expenses which have been classified as : 

1. Direct material 

2. Direct labor 

3. Direct expenses 

4. Indirect charges 

5. Selling expenses 

6. Administrative expenses 

Prime Cost. The sum of the direct material cost plus the 
direct labor cost is known as the prime cost. 



30 



COST-FINDING ELEMENTS AND METHODS 



Factory Cost. The sum of the prime cost plus the in- 
direct charges is known as the factory cost. 

Total Cost. The sum of the factory cost plus the sell- 
ing expenses and the administrative expenses is known as the 
total cost. 

Selling Price. The sum of the total cost plus the profit 
is known as the selling price. 

These gradations of cost may be further illustrated by 
means of the following simple diagram (Form i), which illus- 
trates the steps leading from the material cost to the selling 
price. 











Profit 
25 cents 


Selling 
Price 
$i.7S 




Selling and 
Administra- 
tive 
Expenses 
25 cents 


Total Cost 
$1.50 




Indirect 
Charges 
so cents 


Factory- 
Cost 

$I.2S 




Direct 

Labor Cost 

50 cents 


Prime Cost 
75 cents 


Direct 
Material 

Cost 
3i cent* 





Form I. Diagram Showing Relation of Cost Elements to Selling Price 



ELEMENTS OF COST 2T 

Deductions 

In practice it is customary to allow certain deductions 
from the established 'selling prices, or from the established 
purchasing prices. These deductions include : 

1. Trade discounts 

2. Allowances 

3. Rebates 

4. Cash discount 

As a rule, the trade discounts are deducted directly upon 
the invoices rendered, and therefore do not enter into the 
account-keeping of the seller or purchaser. 

Allowances to customers are treated as deductions from 
sales, though in some cases these items are included among 
selling expenses. Allowances received from creditors are 
generally considered as direct deductions from the invoice 
values and treated accordingly. It is quite customary to delay 
the passing of disputed invoices for account-keeping until all 
legitimate allowances have been deducted. 

Special rebates allowed customers at the end of a definite 
period or after the expiration of a specified contract, may 
be treated usually as miscellaneous deductions from income. 
In some instances these items may be considered as deductions 
from sales. Similar rebates received by the purchaser may 
be treated either as miscellaneous income or as deductions 
from cost. However, it is often very impracticable to treat 
items of this character as deductions from cost because, in 
the operation of the cost system, it may be necessary to use 
the cost values shown upon original invoices — this because the 
amount of the rebates deductible cannot be definitely ascer- 
tained until the expiration of a particular period. 

Cash discounts allowed and received are items which 
are treated in various ways in practice. In some instances, 
they form part of the capital expense and capital income, be' 



22 



COST-FINDING ELEMENTS AND METHODS 



Factory 
Cost 



TOTAL COST 



Selling 
Ex- 
penses 



Prime /I. Direct Material 
Cost \2. Direct Labor 



Indirect 
Charges 



Adminis- 
trative ' 
Expenses 



1. Indirect 
Material 



Indirect 
Labor 



3. Indirect 
Expenses 



Material which cannot be applied in a 

direct manner 
Supplies 
Scrap Material 
Small Tools and Dies 

Indirect or Non-Productive Labor 

Supervision or Foremanship 

Superintendence 

Insjjection (when not considered as a 

direct labor charge. 
Factory Clerks' Salaries 
Defective Work 
Experimental Work 

Rent 

Insurance — Fire and Liability 

Taxes 

Interest 

Depreciation 

Maintenance, Repairs, and Renewals 

Power 

Light 

Heat 

Freight and Cartage Inward (when 

not considered as part of direct 

material charge) 
Over, Short, and Damage 
. Miscellaneous Factory Expenses 



Advertising 
Sample Expense 
Commissions 
Salesmen's Salaries 
Salesmen's Expenses 
Traveling Expenses 
Sales OHice Expenses 

Rent 

Clerks' Salaries 

Telephone and Telegraph 

Printing and Stationery 

Postage 

Miscellaneous Expenses 
Freight and Cartage (Outward 
Shipping Department Expenses 
Finished Stock Warehouse Expenses 

' Officers' Salaries 
Office Salaries 
Executives' Expenses 
Auditing Expenses 
Legal Exrenses 
Administrative Office ExpensCT 

Salaries 

Rent 

Light and Heat 

Telephone and Telegraph 

Printing and Stationery 

Postage 

Office Supplies 

Miscellaneous Expenses 



Total Cost+Profit=Selling Price 



Form 2. Chart Showing Analysis of Cost Elements 



ELEMENTS OF COST 23 

ing included as deductions from, and additions to, income. In 
other instances, they are deducted from sales prices and the 
purchase prices. When fixing selling prices, these miscella- 
neous items should also be considered as well as the elements of 
cost and the selling and administrative expenses. 

Analysis of Elements of Cost 

Form 2 shows the items which should be considered in 
fixing a selling price. 



CHAPTER III 

GENERAL METHODS OF COST-FINDING 

Requirements of Cost-Finding 

As costs furnish the basis for determining the selHng 
prices of the manufactured product, they naturally should be 
compiled so that the total cost of the job, order, or article may 
be readily ascertained. 

Actual conditions in manufacturing determine the sys- 
tem of cost-finding to be used, which should include : 

1. A method of ascertaining or reporting the material, 

labor, and overhead costs. 

2. A method of compiling these elements of cost. 

3. A method of determining the total cost of the job, 

order, or article. 

For present purposes the actual conditions which exist 
in manufacturing industries may be grouped or summarized 
in two general classes, and the methods of cost-finding 
applicable to these two classes may be designated as follows : 

1. Order method of cost-finding 

2. Process method of cost-finding 

Order Method of Cost-Finding 

Distinctive Features of Order Method 

When the order is the tangible basis upon which the ele- 
ments of cost are charged, compiled, and determined, the 
order method of cost-finding is generally used. In other 
words, under such conditions the material costs, labor costs, 

24 



GENERAL METHODS 



25 



and a pro rata share of the factory overhead are all charged 
to definite factory orders, and the elements of material, labor, 
and overhead costs are compiled so that the total factory cost 
of each individual order may be determined. If a number of 
units are manufactured under the definite factory order, the 
unit article cost may be determined by dividing the total fac- 
tory cost by the total quantity manufactured or produced. 
Definite factory orders may be issued for the manufacture of 
a number of units, for a single unit, or for the manufacture 
of certain parts of a unit. 

The order method of cost-finding is often designated by 
other terms, such as : 

Special-order method of cost-finding 
Specific-order method of cost-finding 
Job method of cost-finding 

However, in all industries in which a definite job or order 
furnishes the basis for the compilation of the cost of the 
article, this method of cost-finding may be used, and in view of 
the fact that it includes the issuance of orders for the manu- 
facture and production of standard articles, as well as for 
special articles, it is most accurately described by the term 
"order method of cost-finding." Examples of the applicability 
of the method to specific trades and industries are given below. 

Construction Work 

A good example of an industry in which the order 
method of cost-finding may be applied is the building trade. 
This includes building contractors of various kinds, such as 
general building, iron and steel, foundation, masonry and 
stone-work, carpenter, plastering, electrical, plumbing, and 
heating contractors, and various subcontractors. 

In this class of industries each job, or order, is treated 
separately and the material, labor, and overhead costs are 



26 COST-FINDING ELEMENTS AND METHODS 

ascertained for each job independently of the costs applicable 
to any other job. Therefore, the order method of cost-finding 
is suitable and may be applied very readily. 

Repair Shops 

In repair shops, which may include garages, wagon re- 
pairs, and machine shops doing repair work, the material, 
labor, and overhead costs are ascertained, compiled, and de- 
termined for each job separately, and the bill to the customer 
is prepared with this cost information as a basis; therefore 
the order method of cost-finding may be used. 

Plating Shops 

There exists, throughout the country, a considerable 
number of plating shops doing a so-called special-order busi- 
ness. In these, the material, labor, and overhead costs of 
each individual job are necessarily ascertained independently 
so that the proper charge may be made to each customer for 
his particular job or order. The order method of cost-finding 
may be here used satisfactorily. 

Attention is called to the fact that this classification does 
not include the plating departments of large concerns which 
have their product standardized to such an extent that the 
plating operations become continuous for long periods of time. 
When these conditions exist, the order method of cost-finding 
cannot well be applied, and the process method must be used 
to ascertain accurate costs. 

Cabinet Shops 

Considerable special job work is done in various kinds of 
cabinet shops. These shops manufacture, or build, only on 
order; that is, they construct various kinds of furniture, fix- 
tures, and equipment to meet the individual requirements of 
each customer. Each job, therefore, is handled as a separate 



GENERAL METHODS 27 

unit, bears no relation to any other piece of work in the shop, 
and the elements of cost for each must be determined sepa- 
rately. 

Garment Manufacturing Plants 

On account of the change in styles each season, the gar- 
ment industries manufacture on more or less definite demand, 
and manufacturing is started with the issuance of orders for 
definite styles and quantities. As these definite orders furnish 
the basis upon which the costs are calculated, the order method 
of cost-finding is used most advantageously. Each order for 
the production of a definite quantity of a particular style of 
garment is charged with material, labor, and a proportion of 
the overhead cost; and the article or single garment cost is 
ascertained by dividing the total cost of the order by the num- 
ber of garments produced. Garment manufacturing industries 
include the manufacture of cloaks and suits ; coats, waists and 
dresses; underwear; gowns and evening dresses. 

In some of the garment manufacturing industries, the 
product is standardized and the same articles are manufactured 
continuously day after day. Under such conditions, the in- 
dividual order cannot be used as a cost-finding basis for the 
reason that it loses its identity during the regular daily routine 
of manufacture. It is then more feasible to use the process 
method of cost-finding to ascertain reliable and accurate article 
costs. 

Straw and Felt Hat Plants 

Straw and felt hat plants are also affected by changes in 
styles, and these changes in styles are reflected in the volume 
and kind or orders received. The definite order, then, fur- 
nishes the basis on which the article cost is compiled and ascer- 
tained. 

However, in industries of this character certain depart- 



28 COST-FINDING ELEMENTS AND METHODS 

merits may be so constituted that their costs are more readily 
ascertained by the process method of cost-finding. For ex- 
ample, certain treating processes may be used for all braids 
and felts of a particular kind regardless of the production 
orders, and in departments where such conditions exist the 
process method is used for ascertaining costs. 

Boot and Shoe Plants 

In these industries, again, the styles are a governing fac- 
tor as to the quantity and kind of production which should be 
manufactured during a particular season. The order, there- 
fore, furnishes the basis for reporting, compiling, and ascer- 
taining the article costs in most of the boot and shoe plants. 

Standardized articles and a large volume of production 
may change manufacturing conditions to such an extent that 
the process method of cost-finding can be used more advan- 
tageously. However, before the process method of cost-find- 
ing becomes the more practical method, the identity of the in- 
dividual factory orders must be lost in the large volume of 
factory production which is continuous day after day. 

Wood-working Plants 

In wood-working plants, after the lumber is cut and ma- 
chined, it is, as a rule, chargeable to some particular factory 
order. These factory orders may be for standard articles or 
they may be for special work to meet the requirements of cer- 
tain customers. In the departments in which the material, 
labor, and overhead costs can be applied to definite factory 
orders, the order method of cost-finding may be used to advan- 
tage. 

Metal-working Plants 

In metal-working plants it is the practice to charge the 
cost of the castings to a factory or^er or to some definite job. 



GENERAL METHODS 



29 



This is invariably the case where definite factory orders can 
be used as a basis for reporting and compihng the material, 
labor, and overhead costs. Under these circumstances the 
order method of cost-finding may be used to advantage either 
in those plants in which standard articles are produced, or in 
which special articles are made to meet customers' require- 
ments. In metal-working plants producing large quantities 
of similar articles for stock the process method of cost-find- 
ing may be applied to the product. 

Assembling Departments 

The order method of cost-finding may be used advan- 
tageously in the assembling departments of various manufac- 
turing plants. This is true even though, preparatory to assem- 
bling, the plant may manufacture numerous small parts the 
cost of which can only be compiled by the process method of 
cost-finding. 

In the assembling department definite orders are usually 
issued for the production of fixed quantities of articles. These 
orders may be for a standard product or for a special product, 
and in either case the particular order or job may be taken as 
a basis for reporting and compiling the elements of cost. 

Process Method of Cost-Ftnding 

Distinctive Features of Process Method 

Whenever the process of manufacture is continuous for 
regular periods of time so that the definite factory orders and 
jobs lose their identity and become part of a large volume of 
production, the material, labor, and overhead costs are charge- 
able to the definite processes or operations and the process 
method of cost-finding is used. 

This method is sometimes called the ^'product method of 



30 COST-FINDING ELEMENTS AND METHODS 

cost-finding." However, in view of the fact that the word 
"product" refers more particularly to article rather than 
operation, the designation "process method of cost-finding" 
is more explicit and is preferable. This term includes 
the method commonly known as the "machine-cost method," 
for the reason that the same general principles of cost-finding 
apply. 

After the material, labor, and overhead costs and the 
total cost of the \-arious processes or operations are ascertained, 
these should be summarized and redistributed so that the job, 
order, or article cost may be determined, usually on the basis 
of volume. The quantities which are used as the basis are the 
weight, the number of units, or the measurements of the va- 
rious jobs, orders, or articles; in other words, tons, pounds, 
gross, dozens, yards, feet, etc. 

Foundries 

A common industry where the process method of cost- 
finding may be used to advantage is the foundry. This in- 
cludes iron foundries, brass foundries, and various other metal 
foundries. In these, the melting operation is continuous for 
regular periods of time and no reference is made to the definite 
orders or jobs because their identity cannot be ascertained 
readily. In operation, the material, labor, and overhead costs 
are all charged to the cupola, and at the end of a definite period, 
when the total production is ascertained, the castings cost per 
pound can be determined. 

Paper Mills 

The material, labor, and overhead costs in the manufac- 
ture of paper are chargeable to the milling processes. The 
total quantity or the total number of pounds of paper manu- 
factured at the end of a definite period is determined, and the 
cost of the paper per pound is then computed. 



GENERAL METHODS 3I 

Paint and Varnish Manufacturing Plants 

In small paint and varnish manufacturing plants, the 
material cost may be applied to the various batches definitely, 
as the identity of each batch can always be ascertained and 
the materials which are put into each are counted or weighed. 
Under these conditions the order method of cost-finding may 
be used. 

However, if much red tape is involved in ascertaining 
the labor and overhead cost applicable to each particular 
batch, the labor cost and overhead cost of the various batches 
should, as a rule, be ascertained according to the process 
method of cost-finding. 

Chemical Manufacturing Plants 

In chemical manufacturing plants, continuous operations 
are carried on for regular periods of time and, as the material, 
labor, and overhead costs are applicable and chargeable to the 
processes, the unit or article cost can only be ascertained after 
the definite quantity of production is known. 

In small chemical manufacturing plants, where the volume 
of production is not large and where definite small orders are 
manufactured specially for various customers, it may be pos- 
sible to use the order method of cost-finding to advantage. 

Rubber and Celluloid Manufacturing Plants 

The manufacture of rubber and celluloid calls for condi- 
tions in which the process method of cost-finding can be em- 
ployed advantageously. The identity of individual orders or 
jobs is entirely lost as the process of manufacturing is con- 
tinued for regular periods of time. The materials which enter 
into the manufacturing processes are weighed and counted, 
and charged to the particular process. The labor and over- 
head costs are also charged to definite processes and, after the 
total production is obtained, the unit cost is found. 



32 COST-FINDING ELEMENTS AND METHODS 

Manufacture of Foodstuffs 

In plants where foodstuffs are manufactured and the proc- 
ess of manufacturing is continuous, the identity of definite 
orders cannot be readily ascertained without interfering with 
production. Therefore the process method is used, the mate- 
rial, labor, and overhead costs being charged to the various 
processes of manufacture. 

Coal-Mining 

Coal-mining affords a common example of the process 
method of cost-finding. The labor and overhead cost are 
charged to the definite operations, and, when the production or 
total quantity of coal mined is known, the unit cost per ton is 
determined. 

Ice Manufacturing Plants 

In the manufacture of ice, the process method of cost- 
finding is used, the material, labor, and overhead costs being 
charged to the manufacturing processes. When the total 
quantity of ice produced is known, the cost per ton of ice 
manufactured can be ascertained. 

Treating Departments 

All the product used in textile mills, metal plants, wood- 
working plants, and straw hat plants undergoes a special proc- 
ess or is treated in a certain way in particular departments. 
In such treating departments the process method of cost-find- 
ing is employed and the treating cost for each article is ascer- 
tained after the quantity treated is known. 

Cutting and Machining Department — Wood-Working Plants 

In wood-working industries where large quantities of 

standard product are manufactured, the costs of cutting and 

machining operations may be ascertained according to the proc- 



GENERAL METHODS 



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COST-FINDING ELEMENTS AND METHODS 



ess method of cost-finding. This may be done in cases where 
large quantities of lumber for the standard product are cut and 
machined in the same manner for regular periods of time. 

The material, labor, and overhead costs are charged to 
the various cutting and machining operations, and, after the 
total quantities produced are ascertained, the unit article cost 
is determined. 

Summary of Cost-Finding Methods 

Form 3 shows in summarized form the two basic methods 
of cost-finding and the industries, or departments within a 
plant, to which they are applicable under the conditions al- 
ready described. 



CHAPTER IV 

DEPARTMENTAL AND PRODUCT, 
CLASSIFICATION 

Factory Departments 

Before it can be decided which method of cost-finding 
may be used in any particular plant, the manufacturing depart- 
ments of the plant must be classified. In some industries the 
order method of cost-finding might be applicable to certain de- 
partments, and the process method of cost-finding might be 
applicable to the remaining departments. It is not an unusual 
condition to find both methods of cost-finding used in the 
operating departments of a plant. The classification of fac- 
tory departments also plays a very important part in ascertain- 
ing costs, because the departments furnish the basis for the 
cost reports and also for the cost accounts. 

The various elements of cost — material, labor, and over- 
head — are compiled and proved for each factory department, 
and the costs thus grouped can be proved with a greater de- 
gree of accuracy for each department than would otherwise be 
possible. 

The operating departments of all factories cannot be clas- 
sified in the same manner, though most factories are so organ- 
ized that they may be divided into four main sections : 

1. Raw material and supplies storerooms 

2. Manufacturing departments 

3. Finished parts storerooms 

4. Finished stock storerooms 

For cost purposes, a still more important classification is 
that based on the relation of the factory departments to the 

35 



36 COST-FINDING ELEMENTS AND METHODS 

output of the plant and on this basis they may be grouped and 
classified under the three following headings: 

1. Productive departments 

2. Non-productive departments 

3. Miscellaneous departments 

Productive Departments 

The productive departments include those manufacturing 
departments that do the actual work upon the product. This 
would include work upon the different parts which will eventu- 
ally be combined to form the completed article ; it may include 
work upon items of material which will be returned to stores 
and later be requisitioned out as raw material; and it may in- 
clude actual productive operations upon articles which will be 
stored in a semi-completed state to be made into the completed 
articles at a later date. 

The productive labor element of cost is classified by opera- 
tions as milling, graining, filling, etc., and each productive 
operation is known by some definite term. The sequence, re- 
lation, or uniformity of these productive labor operations 
usually furnishes the basis for establishing productive depart- 
ments in the factory. The sphere of a productive department 
may be limited to a "center" from which the productive work 
is reported. For example, certain labor operations which are 
closely related as to the men and machines employed may be 
grouped to form a particular department, or "center" from 
which the work is reported after the final operation in that 
department has been completed. In other words, after a cer- 
tain number of operations are completed, an inspection or a 
count of the articles manufactured is made, and the quantity 
produced is reported. 

To sum up, productive departments are established after 
considering first the actual work done upon the product; 
secondly, the relation or uniformity of the productive labor 



DEPARTMENTAL CLASSIFICATION 



37 



operations; and thirdly, the basis for reporting production. 
When dividing the factory into its departments the aim 
should be to spHt it up, so far as possible, into uniform and 
connected operations which represent distinct steps in the 
progress of the product through the factory. 

Designation of Departmental Divisions 

Productive departments, and the operations in these de- 
partments, should be given distinctive names and, if possible, 
be designated by distinctive symbols. The names and number 
of productive departments in a particular factory depend upon 
the nature of the work and the size of the plant, but the 
departmental classification may differ in factories turning out 
similar products. The following lists show fairly typical de- 
partmental divisions. 

Furniture factor)'- : 

1. Cutting department 

2. Machining department 

3. Cabinet shop — special work 

4. Cabinet shop — standard work 

5. Paint and varnish department 

6. Trimming department 

7. Inspecting department 
Metal-working plant: 

1. Iron foundry 

2. Brass foundry 

3. Machining standard castings 

4. Machining special castings 

5. Plating department 

6. Assembling department 

7. Inspecting department 
Garment factory: 

1. Cutting department 

2. Hand-sewing department 



38 COST-FINDING ELEMENTS AND METHODS 

3. Machine-sewing department 

4. Trimming department 

5. Inspecting department 

6. Pressing and boxing department 

Non-Productive Departments 

The non-productive departments of a factory are those 
in which the work done is only incidental to, or has an indirect 
relation to the product manufactured, as for instance the power 
plant or storerooms. These departments furnish centers about 
which the various elements of factory overhead arising therein 
or applicable thereto may be compiled. The total factory in- 
direct expenses arising in, or applicable to, the non-productive 
departments is ascertained and is then redistributed to the 
productive departments, for the reason that all factory ex- 
penses must eventually be charged to the productive depart- 
ments in order to reach the definite jobs, orders, articles, or 
processes to which they properh^ apply. 

The non-productive departments are more or less the same 
in dififerent industries, and the following list covers those 
usually found in a well-organized plant: 

1. Power plant 

2. Purchasing department 

3. Receiving department 

4. Storerooms 

5. Engineering and drafting room 

6. Cost department 

7. Planning and routing department 

8. Employment department 

When inspection and experimental work involved in pro- 
duction cannot be charged to jobs, orders, or articles, the ex- 
pense of such work may be departmentalized and treated as 
that of a non-productive department. 



DEPARTMENTAL CLASSIFICATION 39 

Miscellaneous Departments 

In many manufacturing plants the work of some depart- 
ments is partly productive and partly non-productive. A pat- 
tern or tool room, for example, may make patterns or tools 
chargeable to a specific job or order and make other patterns 
or tools chargeable to the factory overhead; or a mechanical 
department may construct machinery, fixtures, and equipment 
for sale or for the use of the factory itself — in which case their 
cost is to be capitalized among the fixed assets of the business; 
or such a department may also do work which is purely inci- 
dental to production, such as repairs and maintenance — the 
cost of these items forming part of the indirect or administra- 
tive expenses of the factory. In such cases, on account of the 
two-fold character of the departmental work, a separate clas- 
sification must be provided and they are usually known as mis- 
cellaneous departments. 

Miscellaneous departments usually include : 

1. Mechanical, millwright, or repair department 

2. Pattern department 

3. Tool room 

Under some conditions, these miscellaneous departments 
may be advantageously classified as productive departments. 
When this is the case these departments should receive credit 
for (i) all work done upon the product, (2) the cost of any 
construction work such as the manufacture of machinery, fix- 
tures, and equipment for factory use, and (3) any repair and 
maintenance work chargeable to overhead. In most cases, 
however, the work of miscellaneous departments is largely 
non-productive, in which case it is absorbed in the factory 
overhead in the usual way. 

General Operating Expenses 

All items of overhead should be distributed to the depart- 
ments which benefit from the expenditures, whenever this is 



40 



COST-FINDING ELEMENTS AND METHODS 



possible. In large plants, however, not all expenditures can 
be assigned in this way. Some of them, such as repairs to 
factory sidewalks, tramways, general yard work, general 
superintendents' salaries and expenses, production managers' 
salaries and expenses, and so on, are obviously incurred, not 
for the benefit of one or more departments, but for the plant 
as a whole. 

Expenses of this character are considered as general 
operating expenses, and are treated in the same manner as 
costs which are applicable to the non-productive departments. 
To dispose of these expenses so that they will eventually be 
absorbed in the cost of the product manufactured, they may 
be charged in the article cost as a separate item of overhead, 
or provision may be made for distributing them over the va- 
rious departments of the plant. 

Summary of Departmental Classification 

Form 4 shows the classification of various factory depart- 
ments in summarized form. 

Classification of the Product 

One of the objects of operating a cost system is to deter- 
mine the profits on the various classes of product manufac- 
tured. Year by year the variety of articles placed on the 
market increases and experts have gone so far as to say that 
many inefficiencies and losses are due to the fact that too wide 
a range in variety is offered to the public. In other words, the 
manufacturers of today are not standardizing their product as 
they should. 

Under such circumstances as these, the cost of each article 
or product manufactured is vital information, as without it 
the manufacturer works in the dark. He cannot intelligently 
standardize production because, not knowing which are his 
most profitable lines, he does not know on which to concen- 



PRODUCT CLASSIFICATION 



41 



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42 COST-FINDING ELEMENTS AND METHODS 

trate. Therefore, every cost system should provide for a 
comprehensive classification of the product, and costs should 
be ascertained on each class. 

Some factories make only standard products, others work 
only on special orders, and others again combine both and also 
buy manufactured goods for resale. In the latter case the 
first step in the classification is to divide the articles sold as 
follows : 

1. Standard articles manufactured for sale. 

2. Special articles made to meet the requirements of cus- 

tomers. 

3. Articles purchased for resale. 

The three broad divisions enumerated above may be sub- 
divided into as many classifications as there are lines of 
manufacture, or kinds of product sold. 

One of the best sources of information for establishing 
this classification is the catalogue or advertising literature 
issued in connection with the sales of the product. The fol- 
lowing classification is an example. 
Varnish and paint industry : 

High-grade varnishes 

Medium-grade varnishes 

Wood-stains 

Fillers 

Japans 

Dry colors 

Mixed paints 

Enamel paints, etc. 
In certain industries, it may be advantageous to have a 
very extensive product classification, the number depending, 
of course, upon the differences in the costs of a varied line. 
The above heading "mixed paints," for example, might be 
further subdivided into a dozen or more classes if the cost of 



PRODUCT CLASSIFICATION 43 

the various kinds of mixed paints varied sufficiently to make it 
worth while to calculate the cost of each separately. 

The classification of the product also furnishes a basis for 
establishing storerooms for the different lines produced, such 
storerooms being controlled separately by distinctive cost ac- 
counts. These provide a means for checking the accuracy of 
the application of the elements of cost to the items of product 
stored. 



Part II — Factory Routine and Detailed Reports 



. CHAPTER V 

FACTORY ORDERS 

Function of the Factory Order 

After the product manufactured has been definitely classi- 
fied, and distinctive factory departments established to pro- 
vide centers for determining and reporting costs, some means 
must be found for applying the cost to the product as it passes 
through the operating departments. For this purpose, all 
items of product must be distinctively designated. This is 
usually done by means of order numbers, which not only facili- 
tate the compiling of the elements of cost but also aid in trac- 
ing the jobs, orders, or articles through their different stages 
of manufacture. Work, whether upon orders or repairs, is 
generally put in operation by means of a proper authorization 
known as a "factory order." This carries a number by which 
the job, order, or article is thereafter known and distinguished 
from others. 

Inadequacy of Verbal Orders 

In small plants where the work is simple in character, in- 
structions may be issued verbally. This practice is to be con- 
demned regardless of whether or not a cost system is used, as 
many inefficiencies may be traced to orders of this character, 
the following being typical : 

I. Loss of time due to delay of proper instructions in 
reaching the operating departments. 

45 



46 DETAILED FACTORY REPORTS 

2. Loss of time in tracing the product in the operating 

departments of the plant. 

3. Errors in workmanship due to the misunderstanding 

of instructions. 

4. Irregular production due to the absence of the tan- 

gible instructions which are . essential if factory 
work is to be given out in the proper order, 

5. Indefinite and unreliable deliveries to customers due 

to the absence of a systematic record and method 
of tracing the various jobs, orders, or articles 
through the operating departments of the plant. 

6. Absence of a definite record to serve as a basis for 

an accurate system of reports, whether it be a sys- 
tem of cost reports or a system of production or 
statistical reports. 

Written Factory Orders 

The efficiency of a plant can be judged only from the 
information furnished by a well-planned system of reports. 
Therefore, it is absolutely necessary that the authorizations to 
the factory to do any sort of work be made in writing so that 
these instructions may be kept in a permanent and accurate 
form and serve as a basis for reports and records. 

Before deciding on the form and general style of factory 
orders, consideration should be given as to whether or not 
they give sufficient information so as to dispose of the 
objections to verbal orders. These objections summarized 
are loss of time, errors in workmanship, interference with 
production, improper deliveries to customers, and absence of 
permanent records. If the written factory orders dispose of 
these objections and insure the establishment of a permanent, 
accurate, and reliable system of reports, the benefits derived 
are apparent. In order to provide for these qualities of per- 
manency, accuracy, and reliability, which are most essential 



FACTORY ORDERS 47 

and which are not obtainable with verbal orders, the written 
orders must contain the following: 

1. Date, order number, and description and authoriza- 

tion of the work to be done, thus permitting ready- 
identification and furnishing a basis for applying 
and charging the elements of cost. 

2. Complete instructions as to the method of doing the 

necessary work. 

3. Required date of completion, so as to provide a means 

for ascertaining the order in which the different 
articles should be manufactured. 

4. Provision for recording information as to the prog- 

ress and completion of the order in each depart- 
ment of the plant, so as to provide a means for 
tracing orders and insuring prompt deliveries to 
customers. 

It is evident that the above information covering working 
instructions can only be accurately transmitted in written form, 
A logical objection to the use of written factory orders some- 
times advanced is that, if the mechanics in a small factory or 
a repair shop were always to wait for the issuance of written 
orders before beginning a fresh job, unnecessary delays would 
occur and time would be lost because of the red tape methods. 
In some cases verbal instructions may be given ; but a written 
order should follow the verbal instructions so that workers 
cannot plead ignorance if mistakes are made and so that time 
and material may be charged to the order number to which 
they are to be applied. 

Kinds of Factory Orders 

Factory orders are of two kinds: those relating to pro- 
duction and those relating to miscellaneous factory work. 

A production order authorizes the manufacture of certain 



48 DETAILED FACTORY REPORTS 

kinds of goods, or a single article which may be either for sale 
or for stock. 

Miscellaneous factory orders are issued for the purpose 
of authorizing tlie construction or repair of factory buildings, 
machinery, tools, fixtures, or equipment. These orders are 
variously termed "Repair," "Betterment," "Maintenance," 
"Construction." "Shop," and "Plant" orders, the precise desig- 
nation depending upon the character of the work to be done 
and the method in use in the plant. 

Production Orders — Classification 

Production orders may authorize the manufacture of 
either the completed product or parts thereof, and may be 
classified as follows : 

I. As to special production: 

(a) Orders for specially manufactured product. 

(b) Orders for specially manufactured parts. 
2. As to standard production : 

(a) Orders for standard product. 

(b) Orders for standard parts. 

(c) Orders for part-finished product. 

(d) Orders for manufactured parts. 
'3. As to repair production : 

(a) Orders for repairs to the product for cus- 

tomers, or for repairs on product in the 
various stockrooms. 

(b) Orders for disposition of defective work, or 

the correction of defects in finished stock, 
part-finished stock, or finished parts. 

Designation of Quantities 

In the order method of cost-finding the quantities to be 
manufactured and the disposition of the product are in most 
instances specified in the production orders. If the product 



FACTORY ORDERS 49 

is a standard article kept in stock, it is advantageous to estab- 
lish a definite quantity to be produced at any one time. Stand- 
ardized units of production tend to increase shop efficiency by 
equalizing the demands for material and labor and insuring a 
steady flow of work through the factory. If the quantities of 
a standard product which is manufactured over and over again 
vary on each factory order, work tends to become spasmodic 
and its flow uneven with, in consequence, either congestion or 
slackness in the operating departments. 

Under the process method it is not always practicable 
to specify definite quantities upon the production orders, for 
the reason that where this method is used the processes are 
usually continuous, lasting one or more days or even weeks. 
Orders are issued daily, weekly, or monthly, as required for 
the production of the articles designated thereon, and the 
quantity produced is usually determined after their manufac- 
ture and inspection is completed. 

Sub-Production Orders 

Where the product is composed of several parts manufac- 
tured separately, two kinds of production orders are issued : 

1. The main or principal production order 

2. Sub-production orders 

The main production order designates the quantity and 
kind of completed articles, while the sub-production orders 
cover the manufacture of the various parts. The sub-produc- 
tion orders may be prepared and issued at the same time as 
the main production order, or they may be written up by the 
factory foremen or their clerks when it is necessary to manu- 
facture the parts. 

The Grouping of Small Orders 

In factories where the units of production are small and 
numerous, the p^'eparation of a separate order in each case 



50 DETAILED FACTORY REPORTS 

may involve so much clerical work as not to be worth the 
expenditure in time and trouble. If the system of cost-finding 
proves this to be a fact, the work can be simplified by grouping 
a number of small orders daily, weekly, or monthly and accord- 
ing to the classification of product. In this way one compre- 
hensive order can be issued to cover the production of a score 
or more of small special orders. The advantages of thus 
grouping orders when the product is sufficiently homogeneous 
to permit it, are apparent. The number of records required 
is greatly reduced, with a corresponding reduction in the 
clerical work involved. 

Special Production Orders 

In some industries the entire line of merchandise is spe- 
cially manufactured to customers' requirements. In such 
cases all the production orders issued to the manufacturing de- 
partments are for special production. These authorize the 
manufacture of the special product and the special parts, all of 
which are ready for shipment as soon as the work has been 
completed. 

In other industries the product manufactured is more or 
less standardized and the special product forms only a portion 
of the total factory production. In cases of this kind it is 
essential so to designate the special production that it may be 
classified separately and not be confused with the regular 
staple line of merchandise. 

The Production of Parts and Finished Stock 

Production orders are issued for a standard product or 
for the manufacture of material or parts which will later form 
part thereof. This standard product includes those articles 
which form the staple line of the particular industry and which 
may be carried in stock for future sale. When the finished 
stock of certain standard articles is depleted, production orders 



FACTORY ORDERS 



51 



may be issued for standard product which is to be shipped to 
customers as soon as the manufacture of the articles is com- 
pleted. Under such circumstances, the standard product does 
not go to the stock-rooms at all. 

Standard production orders may authorize the manufac- 
ture of finished stock, finished parts, part-finished stock, or 
manufactured parts. The term "finished stock" designates 
the completed product stored ready to be shipped. Finished 
parts comprise those portions of the product which are stored 
to await their assembly into the completed article. Part-fin- 
ished stock comprises all stock in an uncompleted stage of 
manufacture. Though "manufactured parts" has practically 
the same meaning as "finished parts," in some industries the 
parts to be used in the manufacture of the completed article are 
stored in the raw material storeroom where they are treated 
as raw material and requisitioned out when needed. To dis- 
tinguish them from any finished parts kept in a parts stock- 
room, they are designated "manufactured parts." 

To illustrate these various classes of production, the 
classifications used in the manufacture of desks may be cited. 
The completed desk is classed as finished stock; the sides, top, 
and drawers of the desk may all be completed separately and 
stored as finished parts ; the assembled desk in the white, that 
is, before the varnish and finish has been applied, may be 
known as "part-finished stock." The locks and handles may 
be manufactured and transferred to the raw material store- 
room and be designated as "manufactured parts." 

"Finished stock" is also known as "manufactured stock" 
and "completed stock." "Finished parts" are also often 
termed "completed parts" and "manufactured parts." "Part- 
finished stock" is frequently designated "semi-finished stock," 
"partly finished stock," "partly completed stock," and "partly 
manufactured stock." The precise term used is immaterial if 
the meaning in all cases is clear. 



52 DETAILED FACTORY REPORTS 

Repairs to Product Orders 

Production orders are sometimes issued to cover repairs 
to product, especially where the necessity for repairs occurs 
frequently. Such an order may relate to defective articles 
which are to be repaired and made salable. In all cases, pro- 
duction orders issued for the disposition of defective work, 
or for the correction of defects in articles manufactured, 
should be numbered and distinctively designated so that the 
costs may be properly applied. If the defective product can- 
not be repaired, the onl}^ practicable method of disposal may 
be to scrap it and sell it as such, or to reconvert it into raw 
material. 

Miscellaneous Factory Orders — Classification 

Miscellaneous factory orders include the following: 

1. Construction orders, issued for the erection of new 

buildings, or the manufacture of machinery, tools, 
and equipment. 

2. Betterment orders, issued to improve the buildings, 

machinery, tools, and equipment, or for experi- 
mental work which w'ould tend to improve the 
processes of manufacture. 

3. Repair and standing orders, issued to authorize the 

necessary repairs to the buildings, machinery, 
tools, or equipment. 

These orders, like any other factory orders, are issued to 
collect the cost of the work they designate. The disposition 
or treatment of the cost is separately considered in following 
sections. 

Construction Orders 

As the cost of work done under construction orders adds 
to the capital investment in plant, it is capitalized among the 



FACTORY ORDERS 53 

fixed assets. While it is apparent that no items of cost should 
be charged against a construction order which would unduly 
inflate the value of the asset produced, it is necessary to point 
out that this is frequently done through inexperience. Ma- 
chinery constructed in a plant ill-adapted for the purpose has 
sometimes been capitalized at a much higher figure than that 
at which it could be purchased in the open market. 

Betterment Orders 

If betterment orders are issued for improvements which 
are permanent in their nature, such as the erection of parti- 
tions or the construction of a roadway, the costs should be 
capitalized among the fixed assets. If the betterment is an ex- 
pense of a recurring nature, it should be charged to overhead, 
in which case, if large in amount, it may be treated as a de- 
ferred charge and its cost spread over several periods. The 
expense of painting the building is a case in point. Such a 
betterment obviously cannot be regarded as of any asset value, 
and yet it is not an expense wholly chargeable to the period in 
which the work is done. 

Repair Orders 

The cost of any repair work on buildings, machinery, 
tools, fixtures, and equipment should be compiled and charged 
to the department for which the expense is incurred, or to a 
general "Maintenance and Repairs" account if the expense is 
to be distributed over more than one department. 

Certain kinds of repair work which recur with regular 
frequency, such as the repairing of belts, the sharpening of 
tools, the changing of dies, etc., may be covered by monthly 
repair orders. This makes unnecessary the issuing of a new 
repair order every time such work needs to be done, as all 
work of this character can then be charged to a "standing 
order" number to be described in the following section. 



54 



DETAILED FACTORY REPORTS 



Standing Orders 

Where the same kind of product is manufactured in simi- 
lar quantity with more or less regular frequency, or where 
certain kinds of repair work form part of the ordinary routine 
of factory maintenance, a "Standing Order" may be issued to 
authorize the performance of that particular kind of work as 
required. Such an order may cover a definite period or 
"stand" until further notice. Workers then charge their time 
and any material used on a particular standing order against 
its number. This procedure does away with the necessity of 
issuing new orders to cover similar jobs again and again, 
while it standardizes and greatly simplifies the giving of in- 
structions to employees. 

To enable workers to charge their time and material cor- 
rectly, the standing orders and their numbers are usually 
brought to the attention of factory employees by posting them 
on the department bulletin boards or by printing them on the 
back of time sheets — properly classified as to kinds of work 
for ready reference. 

When a considerable number of standing orders are 
issued, an order register is a convenience, showing the fixed 
standing order numbers and the description of the work to be 
done under each of these orders. 

Order Numbers 

All factory orders should be numbered and classified by 
means of a definite series of numbers allotted to each class — 
as I to 5,000 for standard production orders, 6,000 to 8,000 
for special production orders, 9,000 to 10,000 for other fac- 
tory orders, and so on. The classification may also be desig- 
nated by prefixing or affixing letters of the alphabet to the 
numbers. Employees then know at once the class of work 
involved when the key letter or number of the order is re^ 
ferred to. 



FACTORY ORDERS 55 

Summary of Factory Orders 

Form 5 summarizes the various kinds of factory orders 
which may be issued and the functions of these records. 

Designing Factory Orders 

The precise ruHng of, and information furnished by, the 
factory order depends wholly upon the functions it is to per- 
form. In actual practice it ranges from a simple notice to 
begin operations upon a certain class of work, to an elaborate 
record upon which may be compiled the various elements of 
cost affecting the particular order. 

The design of the form may be determined by answers to 
the following questions. These will indicate the amount of 
information the record is to contain and thus the rulings and 
spaces to be provided. 

1. By whom is the order to be issued and authorized? 

2. How many copies are to be issued? 

3. What is to be the disposition of each copy? 

4. What are the requirements as to recording progress 

of work, defects, shipments, etc. ? 

5. What is to be the final disposition of all copies? 

The answers to the above questions are covered in following 
sections. 

Issuance and Authorization 

In a large plant a special order department may be organ- 
ized for the issuance of factory orders if the work is sufficient 
in its volume and detail to occupy the time of several em- 
ployees. In some cases, however, the order work is taken care 
of in the factory superintendent's office. In small factories, 
the cost department, the shipping department, or the sales de- 
partment may handle the work. 

When special goods are manufactured for customers their 



56 



DETAILED FACTORY REPORTS 



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FACTORY ORDERS 57 

orders govern the issuance of factory instructions entirely. 
When standard products are turned out to a large extent, the 
maximum and minimum quantities on hand, as shown on the- 
stock records, govern the kind and quantity of production. 
The miscellaneous orders issued to cover construction, repair, 
and betterment work, will obviously depend upon the require- 
ments in each case. 

Number of Copies 

The number of copies of the factory order may range 
from one to eight or a dozen, depending upon the number 
of operating departments through which the order passes, and 
the final disposition of the product when it is completely manu- 
factured. 

As many copies of the factory order should be made out 
as there are persons requiring the instructions or information 
it contains. Where work is of a simple character two copies 
may suffice. One follows the job through the various processes 
of manufacture, and the other is kept in the office. If, how- 
ever, the work passes through several departments and a num- 
ber of foremen require special instructions, it would obviously 
be advantageous to issue a separate copy for each department. 
If the instructions go into great detail they should be entered 
on a standard practice sheet and a copy of the instructions 
should be attached to any order to which they apply. Blue- 
prints, sketches, or drawings, should also be attached when 
required. 

Simple Form of Factory Order 

The simplest kind of a factory order which may be issued 
contains information as to : 

1. Order number and date. 

2. Department of the plant for which the special copy 



58 



DETAILED FACTORY REPORTS 



of the order is intended, and date the order is to 
be completed. 

3. Quantity of product and description of the work to 

be done. 

4. Signature of the person responsible for the issuance 

of the order. 
The simple production order shown in Form 6 gives all 
the above information. 



FACTORY ORDER 

No 

Date 

To Department 


Manufacture the following articles and have same completed _... 


Quantity 


Description 


































Approved by 


Signature. 



Form 6. Simple Factory Order. (Size, 8 x 5.) 



Development of Factory Order 

Further stages in the development of the order are when, 
in addition to descril)ing the work, it also designates: 



FACTORY ORDERS 59 

1. The material to be used. 

2. The patterns, tools, or dies required. 

3. The time the work begins and ends. 

4. The production, classified as to good and defective. 

5. The date of shipment. 

6. The cost of the order. 

Thus such a record may be developed to serve any or all 
of the following purposes : 

1. Factory order and instructions to foremen 

2. Factory order and material requisition 

3. Factory order and labor report 

4. Factory order and production report 

5. Factory order and shipping record 

6. Factory order and cost sheet 

When the factory order is combined with the material 
requisition, a copy should go to the stock clerk, so that he may 
be notified of the material requirements of the particular job- 
This enables him to check the quantity issued, which cannot be 
exceeded except upon the request of a responsible official. A 
supplementary material requisition should then state the rea- 
son for the additional withdrawal. Factory orders of this 
kind guard against dishonesty and serve as a check for re- 
porting spoiled or defective work, which otherwise might pass 
unnoticed. Whether or not the factory order is used as a ma- 
terial requisition, or a separate requisition is made out from the 
information given on the order, is a matter of convenience in 
a given case. 

When the factory order and labor report are combined, 
this form should provide for gathering information as to the 
quantity produced, the time spent in producing it, and the men 
employed, after which it is returned to the cost office so that 
the labor cost of the order may be compiled. 

When the quantity produced is reported upon the factory 



6o DETAILED FACTORY REPORTS 

order, it becomes a production report. When it is desirable 
for the factory order to serve this purpose, it may be printed 
and prepared in the form of perforated coupons — one for each 
department from which a report of production is required. 
The receipt of these coupons in the office then indicates the 
progress of work and the completion of the job in the depart 
ment which has sent in its coupon. 

When the duplicate copy of the factory order takes the 
form of a shipping order, it should contain all necessary ship- 
ping instructions and space for recording shipments, either in 
part or in whole. When the duplicate copy serves as a cost 
sheet, it should provide columns for collecting the material, 
labor, and overhead cost of the job. 

Filing and Final Disposition of the Factory Order 

The filing and final disposition of the various copies of 
the factory orders depend to a large extent upon the use in 
each case. Upon each copy should be printed the exact pur- 
pose for which it is to be used, and also to whom it is to be 
sent. One copy should remain, of course, in the department 
in which the order originated. If it is not possible to issue the 
orders from a department, an order register should be kept 
showing the numbers of those issued, with a description of the 
work to which they relate ; or a copy of all orders issued may 
be filed to give the required information. 

If a copy of the order is used as a material requisition, 
this copy should be returned to the cost office after the infor- 
mation as to the quantity and description of material issued has 
been entered and approved by the stock-keeper. In the cost 
office, it would be filed in a separate material requisition file, 
according to order number or requisition number, if one were 
used, after the information as to material cost has been prop- 
erly posted on the cost records. 

When a copy of the factory order is used as a labor re- 



FACTORY ORDERS 6t 

port, this copy is returned to the pay-roll department and cost 
office, after the information as to the labor cost has been 
properly entered thereon. When the pay-roll department and 
cost office have finished transferring the information to the 
pay-roll records and cost sheets, the labor reports may be filed 
according to department and order number, or according to 
department and operator's number. 

Copies of the factory orders used as production reports 
should be returned to the cost office after the information as 
to production has been properly recorded in the factory. These 
production reports should be filed according either to operating 
department and date, or to factory order number after the in- 
formation has been transferred to the summarizing records. 

The shipping record copy of the factory order — when this 
is used — often remains in the shipping department where, 
after the entire order is shipped, it is filed in a separate loose- 
leaf "Completed Orders Binder" according to factory order 
or shipping order number. If the shipping record copy of the 
factory order is returned to the office after the order is entirely 
shipped — for the purpose of preparing the customer's invoice 
— such copies may be filed according to factory order number 
in a loose-leaf binder in the office. 

When a copy of the factory order is employed as a 
cost sheet, such copies are filed in loose-leaf binders, according 
to order numbers so as to facilitate the daily postings of the 
material, labor, and overhead items to cost sheets. After the 
orders are entirely completed and the total costs are ascer- 
tained, the cost sheets are filed according to the factory order 
number, customer's name, or articles manufactured — as the 
case requires. 

Sales Orders 

When the product is specially manufactured, the cus- 
tomers' instructions form the basis for the issuance of the pro- 



62 



DETAILED FACTORY REPORTS 



duction orders the data for which are usually obtained from 
the sales orders. 

Orders from customers may come in from several sources 
and in many forms, but most organizations provide a stand- 



SALES ORDER 
Date... 



Customer's Name.. 
Address 



Terms 

Shipping Instructions. 



No. 



Article 



Grade 



Quantity 



Price 



Amount 













































Approved by Taken by 





Form 7. Sales Order. (Size, 6 x 11.) 



ardized sales order blank similar to that of Form 7. On this is 
recorded the customer's name and address, together with ship- 
ping directions and terms for the payment of the merchandise, 



FACTORY ORDERS 63 

also sales order number and date. Columns below provide 
for recording the article or style number, the quantity ordered, 
the grade or size, and other descriptive information. 

Before the sales orders are passed to the order department 
for registry or to the shipping department for shipment of 
the merchandise, they should be approved by the credit de- 
partment ; and no sales order should be accepted without such 
approval, as the terms proposed and the customer's financial 
status may not be satisfactory. 

If the product is to be specially manufactured, a sepa- 
rate factory order is issued for each sales order received. 
When the product is standard, it may be possible to group 
several jobs and issue one factory order to cover the require- 
ments of a number of sales orders. On the other hand, sales 
orders aie often filled from stock on hand, the factory orders 
being issued for fixed quantities of production for stock at 
various times during the season of manufacture. 

When the process method of cost-finding is used, the 
sales orders received from the customers have only an indirect 
relation to the factory orders. The processes of manufacturing 
are continuous and practically all sales orders are filled from 
the stock of finished articles on hand. 

Registering Sales Orders 

Sales orders should be registered as received so that in- 
formation as to the quantity of production ahead of the fac- 
tory may be readily available at all times. To this end it is 
advisable to make duplicate copies of the sales order, one to 
serve as a register of the order and another for use in pre- 
paring the factory orders. A copy of the sales order is also 
a convenient record of the number of "back orders" on hand 
when part shipments are made on orders of unwieldy size or 
to hasten delivery to impatient customers. In addition, orders 
received should be registered by kinds of articles or product 
in demand to show all of the unfilled sales orders for that 



64 DETAILED FACTORY REPORTS 

particular article. When numerous orders are received for 
delivery at future dates, it is advisable to keep a register of 
sales orders, in which appears each customer's account. To 
sum up the method of insuring that orders are delivered on 
the date promised it is necessary: 

1. To keep sales orders numerically arranged so that 

quick reference may be made to items ordered 
and items which have been shipped. 

2. To register sales orders according .to customers' 

names to show the unfilled order numbers and the 
quantities due on each order. 

3. To register sales orders according to articles to show 

the quantity of each kind ordered. 

Customers often inquire as to the state of their unfilled 
orders, and this information is gathered from the record which 
shows the quantities due each customer on each sales order. 

After an order is completely filled and all the customer's 
requirements have been satisfied, the various copies of the 
sales order are transferred to files which may be arranged 
according to order number, customer's name, or article manu- 
factured. Full indexes should always be maintained, thereby 
enabling quick reference to be made to any sales order, whether 
specified by order number, customer's name, or article. 



CHAPTER VI 

MATERIAL AND MATERIAL REPORTS 

Procedure in Handling Material 

The first element of cost to be considered in cost calcu- 
lations, or when ascertaining the selling price of product, is 
the material cost. The securing and handling of material as 
it comes in and passes through the processes of manufacture 
in the different departments of the plant involves: 

1. Purchasing 

2. Receiving 

3. Storing 

4. Requisitioning 

5. Disposition 

6. Ascertaining cost 

7. Inventorying 

Purchasing the Material 

The routine of purchasing material is mainly concerned 
with the methods by which the different departments of the 
plant make their material needs known, and the methods of 
ordering the material from outsiders. In large organizations 
the purchase of material is always made by or under the direct 
supervision of a well-planned purchasing department. The 
forms generally used in the purchasing department are the 
following : 

1. Purchase requisition 

2. Purchase order 

3. Register of purchase orders 

4. Price records 

65 



66 



DETAILED FACTORY REPORTS 



Purchase Requisition 

The purchase requisition (Form 8) is a request for pur- 
chases, upon which are entered the requirements for materia 
and suppHes for the various departments of the organization. 
A purchase requisition may be prepared by : 

1. Raw material stores clerk 

2. Factory superintendent 

3. Foremen of operating departments 

4. Heads of ofifice departments 



PURCHASE REQUISITION 

Department 

No 

Date 

To 

(Purchasing Agent) 

Please place an order for the following articles: 


Quantity 


Description 


































Date Wanted 


Purchase Order ^ 


Signed 

Jo 


Date of Purchase 


^ Approved 

Order 







Form 8. Purchase Requisition. (Size, 8 x 5.) 



MATERIAL AND MATERIAL REPORTS 67 

Every purchase requisition should bear a number, should 
be properly dated, and should show the department in which 
it originated. It should contain a complete description of the 
material desired, and the quantity, and may provide a space for 
recording the purchase order number at the time an order is 
placed for the material. When the material is needed in a 
hurry, a "rush" purchase requisition may be prepared of a 
different color from the regular purchase requisition. If this 
is not thought advisable, the requisition should be indicated 
in some other way as a "rush'' requirement, so that the order 
for the material will be placed promptly. Purchase requisitions 
should be signed by the person requiring the material and be 
approved by some person in authority, if the person preparing 
them is working in a subordinate capacity. 

As a rule, the purchase requisition is prepared in dupli- 
rate. The original is sent to the purchasing department where 
it is filed after the purchase order has been properly pre- 
pared; the duplicate copy remains in the department in which 
the requisition originated. 

The stores clerk usually prepares purchase requisitions for 
replenishing the stock, in accordance with the maximum and 
minimum quantities of raw stock and supplies to be carried, 
as indicated upon the raw stock records. The minimum quan- 
tities show the limit below which it is not safe to allow stock 
to go, on account of the risk of exhaustion before a new 
supply can be secured, with a possible serious delay in filling 
customers' orders. The maximum quantities are the stand- 
ard amounts above which it is undesirable to go for the 
reason that too much capital may be invested in a particular 
item, or the **over-stock" may deteriorate before it can be used. 
When these maximum and minimum quantities of stock to be 
carried are once definitely established, they are, as a rule, 
entered upon the storeroom records so that the stores clerk 
may have this information always at hand. 



68 DETAILED FACTORY REPORTS 

When the process method of cost-finding is in use, and 
the product is a standard article or line, the stores clerk 
prepares practically all of the purchase requisitions. When 
the order method of cost-finding is in use and the articles 
manufactured are special in character, the requisitions may be 
made out by either the factory superintendent, the production 
manager, or the foremen of the operating departments in which 
the materials are needed, as these foremen know better than 
almost anyone else the material requirements of the special 
work on hand. In some organizations the material require- 
ments for special articles are determined by a well-organized 
material department. In other organizations purchase requisi- 
tions of this nature are prepared by office clerks who, from a 
study of the requirements as shown by the blue-print, sketch, 
drawing, model, or estimate, determine the materials needed. 

Purchase Order 

The purchase order (Form 9) is an order form upon 
which are entered definite instructions to the seller as to 
material and supplies desired. Usually the purchase order is 
made out in duplicate, the original copy going to the selling 
firm and the duplicate remaining in the purchasing department 
where, until the order is filled, it is kept in an unfilled orders 
file. All purchase orders should be given a serial number and 
this number should be entered upon the invoice by the selling 
concern. This simplifies reference to the purchase order should 
any question or dispute arise before the material is finally 
accepted and used. 

The purchase order form should provide for the date, 
and the name of the concern from whom the material is or- 
dered. Provision should also be made for a complete statement 
as to the quantity and kind of material desired. Instructions 
as to the shipment of the articles ordered are often incorpo- 
rated in this form. In most cases the prices of articles or- 



MATERIAL AND MATERIAL REPORTS 



69 



dered are also shown, together with the terms of payment. 
The form should be signed by the head of the purchasing de- 
partment. 



PURCHASE ORDER 

A. B. C. COMPANY 

Philadelphia, Pa. 

No 

Date 

To 




Address 

You are hereby authorized to furnish the following material on 
to be shipped to 


via 


Quantity 


Description 


Price 


Terms 




> 














































































Kindly 
number or 


acknowledge receipt of this order, and place above order 
all packages and invoices. 




(Signature) 



Form 9. Pvu-chase Order. (Size, 8 x 5.) 



When contracts are placed for the purchase of material 
and part shipments are received over long periods of time, 
provision should be made for recording, upon the back of the 



;o DETAILED FACTORY REPORTS 

purchase order, part deliveries of the material. Purchase 
orders should also provide for recording the date of approval 
of the invoice, which denotes that the purchase order has been 
properly filled and completed. After this — the material having 
been received and the invoice passed for entry and payment — 
the copy of the purchase order in the office is transferred to a 
"filled orders" file. 

It is often desirable to combine the purchase requisition 
and purchase order, thereby eliminating the necessity of having 
two forms. This is especially true in small concerns, and in 
such case, three copies of the form would be prepared. The 
original copy goes to the selling company and serves as a 
purchase order; the duplicate copy remains in the purchasing 
department as the reference copy of the purchase order; and 
the triplicate copy remains in the department in which the 
order originated, in this case serving as a purchase requisi- 
tion. 

Register of Purchase Orders 

Every purchase order should, of course, be given a serial 
number so that it can be filed numerically after it is filled, for 
future reference. On the other hand, it is often necessary to 
file unfilled purchase orders alphabetically under names of the 
concerns to whom the purchase orders were sent. From this 
file information can be obtained at any time as to the exact 
date and number of every purchase order which has been sent 
to any particular concern. 

If these orders are arranged and filed alphabetically, ac- 
cording to the names of the concerns to whom they were sent, 
it may be desirable to prepare also a register of purchase orders 
(Form lo), showing the date, the number, and the name of 
the selling concern in a columnar-ruled record so as to facili- 
tate reference to individual orders when checking the invoices, 
and receipt of material, etc. 



MATERIAL AND MATERIAL REPORTS 



71 



REGISTER OF PURCHASE ORDERS 

For the month of , 19 


Day 


Purchase 

Order 

No. 


Name of Concern 

































Form 10. Register of Purchase Orders. (Size, 8 x 11.) 



Filing of Catalogues, etc. 

The purchasing departments of large concerns receive nu- 
merous catalogues, price lists, and price quotations in con- 
nection with the material and supplies which are ordinarily 
purchased by them. The filing and method of using these quo- 
tations, price lists, and catalogues is an office organization 
matter, and as a rule has little direct connection with the cost 
organization. All catalogues should be numbered and should 
be indexed by names and by articles, so as to facilitate refer- 
ence to them. 

The price quotations on materials and supplies, which 
fluctuate considerably, should also be registered upon a per- 
manent record so as to facilitate reference to the prices which 
were quoted at different times. This price record is of value, 
as well, for checking the prices upon the purchase orders and 
invoices and in discovering discrepancies. 



72 DETAILED FACTORY REPORTS 

Price records may be kept upon a standard 3x5 index 
card, these cards being headed with the name of the concern 
which has made the quotation and price. The date of the 
price, and the description or kind of material, should also be 
specified upon these cards. The cards are usually arranged 
alphabetically under the name of the concern, but in some in- 
stances it may be advisable to arrange them alphabetically, ac- 
cording to the article or the class of merchandise which is 
quoted. 

Receiving the Material 

In receiving material and supplies, the following records 
are usually employed : 

1. Receiving record 

2. Report of material received 

3. Invoices from creditors 

Receiving Record 

It may be necessary in some industries to keep a separate 
receiving record of all packages, boxes, barrels, cases, and 
casks of goods received. This record should show the date 
the material is received, the concern from whom it is received, 
and the number of packages, boxes, barrels, etc., received. 
The record should be made by the person receiving the ma- 
terial. A record of this kind is kept when it is impossible to 
inspect, count, and check promptly all the material received, 
and it is very simple in design. Form 11 will answer the 
purpose in many cases. 

Sometimes the receiving record takes the form of a re- 
ceipt book, each receipt of material being recorded in this book 
upon a separate page. In most instances, it is used for tracing 
items the receipt of which is questioned. It is of little value 
for checking invoices received from the selling concerns as 



MATERIAL AND MATERIAL REPORTS 



73 



it does not go into sufficient detail. For this purpose, it is 
necessary to use a more specialized form of material received 
record. 



RECEIVING RECORD 

No 

Date 

Received from 


Address 




Number and 
Kind of 
Packages 


Description 








































Signed 



Form II. Receiving Record. (Size, 6 x 4.) 

When goods are not opened for count and inspection as 
soon as they are received, it is often necessary to accept the 
invoice temporarily as a record, checking the number of pack- 
ages as shown by the invoices with the receiving record just 
mentioned. It may then be necessary at a later date to make 
a claim for "over, short, and damage," which is discovered 
when the merchandise and supplies are actually opened, in- 
spected, and counted. 



74 DETAILED FACTORY REPORTS 

Report of Material Received 

When a thorough inspection is made of material received, 
the results are often reported upon an especially designed 
report of material received, this report being prepared by the 
person making the count and inspection. The advantages of 
using a material received report instead of checking the ma- 
terial directly with the invoices received from the selling con- 
cern, is that it insures an actual count and inspection of the 
merchandise and supplies by the receiving clerk, which is not 
always the case when the invoice is used. 

A report of material received should provide for a record 
of the date the material is received, the name of the concern 
from which it is received, the quantity and complete descrip- 
tion of the material. Provision may also be made for record- 
ing the purchase order number as well as information as to 
the cost of material and cost of handling, including freight, 
express, and cartage costs. If the material is specially or- 
dered for immediate use upon a particular factory order, col- 
umns may be provided on the material received report for 
recording the distribution and charging of the various items 
of material cost. The material received report should, of 
course, be signed by the person preparing it, and it may re- 
quire the approval of some person in authority, who then also 
signs the report. This approval is necessary when the de- 
tailed reports are prepared by some clerk acting in a subordi- 
nate capacity. Form 12 is a simple form of the report of 
material received. 

The purchase requisition, purchase order, and report of 
material received should act as a complete check upon every 
phase of a purchase. 

It is often advantageous to use a copy of the purchase 
order as a material received report. If this can be done, it 
eliminates the necessity of a special record for the material and 
supplies received. Any additional copies of the purchase order 



MATERIAL AND MATERIAL REPORTS 



75 



needed, containing details as to the description of the material, 
the name of the concern, the date, the purchase order num- 
ber, etc., are prepared by means of carbon paper at the same 
time the original copy of the purchase order is prepared. The 
quantity of material ordered is often not shown upon the copy 



REPORT OF MATERIAL RECEIVED 

No 

Received from 


Address 


Purchase Order No 






Quantity 


Description of Material 

































Date Received Date of Invoice 


Received by Date of Invoice 


Date Inspected Entered on Summary 


Inspected by Entered on Stock Records 





Form 12. Report of Material Received. (Size, 8 x 5.) 



which is to serve the purpose of a report of material received. 
This copy goes to the receiving clerk or to the person who in- 
spects and counts the merchandise and who, when it is re- 
ceived and the count and inspection are made, enters the 
quantity actually received upon the report. The receiving clerk 



76 DETAILED FACTORY REPORTS 

is thus compelled to count or measure the material. When 
the merchandise has been received, counted, and inspected, the 
copy of the purchase order which acts as a material received 
report is returned to the office for the purpose of checking 
it with the invoice from the selling concern. 

All material received reports should be sent to the office, 
where they can be checked with the invoices which are received 
from the creditors. It may be necessary to keep a copy of the 
report of material received at the place where the form orig- 
inated and often it is advisable to have a copy of the form pre- 
pared for the use of the cost clerk or stock-keeper so that the 
proper entries can be made upon the cost summaries and 
cost records. 

Invoices from Creditors 

Invoices received from creditors should be passed for 
entry upon the general and cost summarizing records. How- 
ever, before these invoices are approved, they should be 
checked with the purchasing and receiving records. The ma- 
terial purchased should be checked as to the kind, quality, and 
quantity required, ordered, and received. The price as shown 
upon the invoice should also be checked with the price as shown 
upon the purchase order or as shown by the office price rec- 
ords. After the quantity, description, and price have been 
checked, the mathematical calculations should be verified. 

In order that all invoices may be properly checked before 
they are passed for entry and payment, it may be advisable to 
stamp each invoice as it is received with a blank form provid- 
ing space for recording upon the invoice the date or dates 
on which it was checked, and the names of the persons who 
have checked the various features of the invoice. This stamp 
may be designed differently to meet each individual require- 
ment. Form 13 shows a simple design which may be used 
advantageously in many cases. 



MATERIAL AND MATERIAL REPORTS 



17 



Purchase Order No 

Receiving Report No 

Quantity O. K 

Price O. K 

Extensions O. K 

Charge Account No 

Charge Account No 

Charge Account No 

Purchase Record Entry.. 

Stock Record Entry 

Approved 



Form 13. Invoice Stamp. (Size, 3 x 3.) 

Storing Material 

In storing: material, two classes of stock records are usu- 
ally employed : 

1. Bin records 

2. Stores ledger records 

Both of these record information of a similar character, 
but the bin records are often limited to quantities only, whereas 
the stores ledger records contain more complete information, 
dealing with prices and costs as well as quantities. 

Bin Records 

Raw material and supplies are arranged in the storerooms 
in closets, racks, or bins. It is essential that the bin record 
be tacked in a convenient place where the material is stored. 
This bin record should provide for information as to the re- 
ceipt and issuance of the material. Columns may be provided 
for showing the dates and the quantities of receipts and with- 



78 



DETAILED FACTORY REPORTS 



drawals and the quantities on hand. These entries should be 
made upon the bin record daily at such times as material is 
put into, or taken out of, the storerooms, and are usually 
made by the persons who handle the material. Bin records 
should always be of the simplest character and be used for 
checking the more complete transactions shown by the regular 
stores ledger records. A simple bin record is shown in 
Form 14. 



BIN RECORD 

No 

Article Units 


Date 


Quan- 
tity 
Received 


Quan- 
tity 
Issued 


Quan- 
tity 
On Hand 


Date 


Quan- 
tity 
Received 


Quan- 
tity 
Issued 


Quan- 
tity 
On Hand 



















































































Form 14. Bin Record. (Size, 6 x 8.) 

Record of Raw Material 

The record of raw material (Form 15) is one of the 
most important of the factory documents. This record is also 
known by the terms "Stock Record," "Stores Ledger Record," 
"Storeroom Record," etc. It bears the same relation to the 
stock that the cash book bears to money, and therefore should 
be kept with equal care. Stock represents money and is 



MATERIAL AND MATERIAL REPORTS 



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8o DETAILED FACTORY REPORTS 

only another form of it. As the cash book shows the receipts 
and disbursements of the money and the balance on hand, the 
stock record shows the material received, material used, and 
the balance which should be in the storeroom. 

The eflfectiveness of the stock record depends very largely 
upon actual storeroom accommodations and upon the precau- 
tions taken to prevent any but properly authorized persons 
from removing the material from its designated place. If 
access to the storeroom is permitted to everyone, material is 
likely to be taken to fill orders without the authority of a 
material requisition. Also, if access to the stock is easily 
obtained, the men will often replace material damaged in proc- 
ess without making a record of the material withdrawn. 
Such a leak is serious and must be guarded against carefully, 
for, if it exists, it both falsifies the costs and causes consid- 
erable trouble in the cost department. 

The storeroom should be centrally placed, unless a sepa- 
rate storeroom is conducted for each department. The racks, 
bins, etc., should be arranged with reference to the materials, 
so that the whole will be orderly and not look like a junk room. 
Disorder in appearance tends to create disorder in handling. 
Bin records and finding lists, showing the location of the stock, 
may be necessary when the stores are complex and contain 
a great variety of articles more or less similar. Special store- 
rooms or yard places should be reserved for heavy and cum- 
bersome materials close to the place where these materials will 
be needed. 

To record the location of material and to save time and 
space, a system of reference numbers and letters should be 
devised. Thus if B is the symbol for "bolts," B-4-C-17 might 
mean a 4-inch bolt in division C, section 17, of the storeroom. 
These symbols may be used throughout the system of records 
and accounts and result in a great saving of time and trouble. 

A systematically conducted stock record performs other 



MATERIAL AND MATERIAL REPORTS 8l 

valuable functions besides showing leaks. One of the most 
important of these is to provide the data for the "perpetual" 
or "going" inventory. The troubles of inventorying are well 
known; it usually takes a long time, causes much work, and 
sometimes necessitates the temporar}^ closing of the plant. 
Even then the accuracy of the inventory is questionable, yet 
its information is essential in the preparation of any reliable 
statement of financial standing and earnings. With a well-kept 
stock record these usual inventory troubles are avoided, as a 
complete inventory is at hand at any time, showing both the 
amounts and the values of materials in the storeroom. To do 
all this, the record must be designed with columns for ma- 
terial ordered, received, requisitioned out, and balance on hand. 

Besides these columns for inventory information, extra 
columns may be added to distinguish between material re- 
served for orders already received and the balance available 
for new orders. This distinction, together with the record of 
the maximum and minimum amounts, and a column showing 
material ordered but not yet received, gives all the informa- 
tion necessary for keeping the stock supplies up to working 
requirements in every respect. 

When the same article is carried in stock in numerous 
sizes, colors, or styles, it is sometimes advisable, for easy ref- 
erence, to use one sheet for the article as a class, and group 
the different varieties separately. Active stock will require 
separate sheets for each article; but where purchases are infre- 
quent and the stock is drawn out in large quantities, one sheet 
may be sufficient for several articles, blank lines being left on 
the sheet between the different articles. 

The stock record should be verified from time to time by 
actual weight, count, or measurement, so that any discrepancy 
or leak may be discovered. It is a good policy to verify a cer- 
tain number of articles each day or week, without letting it be 
known in advance what articles are to be inventoried. 



82 DETAILED FACTORY REPORTS 

Stock records may be designed to give information only 
as to the quantities of material and supplies, or they may give 
the values as well as the quantities of the material on hand. 

As it is quite usual to have several storerooms in one in- 
dustry, it is often advantageous to have a separate set of stock 
records for each storeroom. Some industries are so organized 
that storeroom records are kept for the main storerooms and 
an entirely separate set of records for the sub-storerooms. 

Whether or not it is advisable to keep one set of stock 
records or several distinct sets of stock records depends, to a 
large extent, upon the physical lay-out of the plant. As cost 
accounting deals largely w^ith the analysis and control of sepa- 
rate detailed items of cost, it is always advantageous to plan 
all records which deal with factory operations so that dis- 
crepancies may be localized and responsibility placed upon def- 
inite persons in the organization. 

Issuance of Material 

The issuance of material from the storerooms usually 
involves the following forms and records : 

1. Material requisitions 

2. Bills of material 

3. Credits for material returned 

Material Requisitions 

A material requisition (Form 16) is an order upon the 
storeroom for a certain quantity of material and supplies 
needed for a particular purpose. Material requisitions may be 
used as requisitions for supplies chargeable to an expense ac- 
count, or for materials for certain definite jobs, orders, or 
articles. Such requisitions are prepared by the foremen of the 
operating departments and by the heads of the other depart- 
ments of the organization. They are formal orders upon the 
storerooms, approving and authorizing the issuance of the 



MATERIAL AND MATERIAL REPORTS 



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84 DETAILED FACTORY REPORTS 

material fur which they call. They should contain detailed 
descriptions of the materials desired, together with quantities. 

Often a requisition is issued for material which is trans- 
ferred from one stock-room to a sub-stock-room or to a par- 
ticular operating department. When the order method of 
cost-finding is in use, material requisitions are usually so de- 
signed that the quantities and descriptions of the material 
called for may be checked up with the requirements of the 
definite factory orders. The stock clerk should check the 
quantity and description of the material before honoring a 
requisition. 

Each requisition should be dated and numbered, and also 
should be signed by the person receiving the material and 
should bear the approval of some person in authority. A 
column should be provided for recording the cost. Form i6 
shows a simple material requisition. 

Under simple conditions of manufacture it is often pos- 
sible to combine material requisition with the factory order. 
In small organizations where all product manufactured is very 
similar in character, the combination of these forms is 
often met with. In large manufacturing industries, where 
the different kinds of articles manufactured are numerous 
and the work done is special and standard, such a combination 
cannot be made profitably. Under such conditions, it is not 
unusual to see five or six different kinds of material requisi- 
tions, all being used practically in the same manner, but each 
containing information of a particular character. 

Material requisitions are also known by various other 
names, as "Stores Orders," "Material Reports," and "Requisi- 
tions for Supplies." 

Bill of Material 

A bill of material (Form 17) is a technical term which 
designates a standardized-material requisition. It is used when 



MATERIAL AND MATERIAL REPORTS 



85 



1 
BILL OF MATERIAL 

Department 

No 

Cost Department: 

The following articles have been taken from Raw Stock for the pro- 
duction of the articles mentioned : 


Articles Produced 


Order Nc 


) 


Quantity.. 








Quantity 


Classifica- 
tion No. 


Description 


V 


For Office Use 


Price 


Amount 



















































































Charge Account Entered on Cost Record... 

Credit Account Entered on Summary 

Entered on Stock Record. 



Form 17. Bill of Material. (Size, 5 x 8.) 



the materials to be issued have been standardized both as to 
quantity and kind. Therefore, it takes the place of material 
requisitions in factories where the product manufactured is 
standardized, the same articles being manufactured repeatedly 
and requiring the same kind of raw material for their com- 
pletion. A bill of material is prepared for each article manu- 
factured and a copy is given to the stock clerk. When a pro- 
duction order is issued, it is then only necessary to present a 



86 DETAILED FACTORY REPORTS 

copy of this crder to the stock clerk who, referring to his bill 
of material for information, will know what material to issue. 

No material should ever be issued, in such cases, unless 
it is covered by the bill of material. Of course, it is always 
possible to use a supplementary or special material requisition 
for material to replace spoiled or defective goods. 

When many different kinds of material are used in the 
manufacture of one article and the product of the plant has 
been standardized, these bills of material may be printed in 
quantities as there is practically no variation in the estab- 
lished specifications. 

When the order method of cost-finding is in use, the bill 
of material given to the stock clerk may specify the order 
number as well as the number of articles to be manufactured. 
Then, when the material is drawn out of stock, the clerk 
should check it with the production order and obtain a receipt 
for all material delivered. Under the process method of cost- 
finding, material obtained from stock, as shown by the bills 
of material, is chargeable to certain definite processes of manu- 
facture, this information being obtained from the bills of 
material. 

Credit for Material Returned 

When material is returned to stock, it is necessary to pro- 
vide for a storeroom credit slip. This form, which is often 
termed "Credit for Material Returned" (Form i8), should be 
filled in by the person who returns the goods, and sent to the 
storeroom with the material which is returned. It may then 
be attached to the original requisition or, if the original requi- 
sition cannot be located readily, this form should be posted 
and summarized separately in the routine of the cost system. 

All material returned should be deducted from the cost 
of the material which has been charged to the particular order, 
job, or process. 



MATERIAL AND MATERIAL REPORTS 



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88 DETAILED FACTORY REPORTS 

The credit for material returned should contain full in- 
formation as to the kind and quantity of such material. Each 
credit should be properly numbered, dated, and approved, and 
should contain the signature of the person receiving the ma,- 
terial in the storeroom. 

Disposition of Issued Material 

All material which is issued from the storeroom is not 
always immediately applicable to definite jobs, orders, or ar- 
ticles. Material and supplies may be transferred in quantity 
from the storerooms to the various operating departments and 
be stored there until needed. Therefore, when the material is 
definitely used in the manufacture of certain definite jobs, or- 
ders, or articles, it is necessary to obtain a report from the oper- 
ating departments, and especially so when substitutions of 
material are made in these departments. In order properly to 
record such data, two additional reports are employed — report 
of material used and interdepartmental material report, dis- 
cussed below. 

Report of Material Used 

The report of material used (Form 19) — also termed 
"Material Report" or "Departmental Material Report" — 
shows that a certain quantity of a particular material has been 
used on a definite job, order, or article. 

When the order method of cost-finding is in use, all ma- 
terials used for the manufacture of certain orders should be 
reported on this form and their costs applied to these orders 
or jobs. When the process method of cost-finding is in use, 
all material used should be reported so that its cost can be 
applied and charged to a definite process or article. 

All reports of material used should be properly dated and 
numbered. They should show the names of the departments 
in which the material is used and provide coluftins for record- 



MATERIAL AND MATERIAL REPORTS 



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MATERIAL AND MATERIAL REPORTS 



91 



ing the quantities and descriptions of such material, and also 
provide a column in which to enter its cost. These reports 
should be signed by the persons preparing and approving them. 

Interdepartmental Material Reports 

Interdepartmental material reports (Form 20) — also 
termed "Material Transfer Reports" — show the quantities and 
kinds of material which are transferred from one storeroom 
to another, or from one operating department to another. 
These reports should provide for recording the departments 
from which and to which the material is transferred, and for 
recording the cost of the transferred material. These reports 
should be properly numbered and dated. They should also 
contain the signatures of the persons preparing and approving 
them. 

In some plants material requisitions or the report of ma- 
terial used (Form 19), may be employed for the purpose of 
recording the transfer of material between operating depart- 
ments. 

Pricing the Material 

In the preceding discussion of the various material re- 
ports, reference has been repeatedly made to the cost of the 
material. The cost of the material is primarily the market 
price at the time the purchase is made, to which should be 
added freight and cartage to give the cost delivered at the yard. 

Often raw material is purchased in bulk and has to be 
sorted and graded, and at such time ha? to be revalued accord- 
ing to the various grades. This is true especially in the case 
of feathers, tobacco, and wool in the grease. The invoiced 
amount of the material purchased must then be adjusted and 
allocated over the various grades, so that the total amount of 
the invoice will be in agreement with the costs assigned to the 
various grades. 



92 



DETAILED FACTORY REPORTS 



Complications sometimes arise in the pricing of scrap 
material which is used in making by-products. Generally 
the percentage of scrap to material is used in arriving at the 
material cost of the by-product. When this is done, the cost 
of the by-product is then deducted from the cost of the pri- 
mary product. However, often there is no way of determin- 
ing the percentage of waste used except at a considerable ex- 
pense. Under such conditions, the scrap value is estimated 
and this estimated cost is applied to the by-product and de- 
ducted from the cost of the primary product. When, how- 
ever, it is absolutely impossible to estimate the cost value of 
the material which goes into the by-product, the amount re- 
ceived from the sale of the by-product is treated as sundry 
income and is added to the profit from operation without any 
consideration being given to the material cost of the scrap 
or waste used in its manufacture. 

In considering the cost of material, it is frequently nec- 
essary to make a provision for adding the storeroom over- 
head, as well as the freight and handling cost. When this is 
done, the storeroom overhead is distributed and added to the 
material cost, according to a percentage method. In some in- 
dustries, however, this method does not give accurate ma- 
terial costs, for high-priced material upon which there may 
be very little storeroom work is then taxed with too large 
a percentage of the storeroom overhead, while low-priced ma- 
terial which is cumbersome to handle and requires much of the 
stock-keeper's attention, might not be charged with its share 
of the storeroom overhead. If it is impracticable to base the 
distribution upon an arbitrary percentage, the charge should be 
absorbed in the general operating expenses and in this way 
distributed over departments. 

The market price of material often fluctuates, in which 
case there are several methods of figuring the cost of the 
material as it applies to the particular jobs, orders, or 



MATERIAL AND MATERIAL REPORTS 



93 



articles manufactured. The one method provides for ascer- 
taining the average cost of all material of a certain kind on 
hand at such time as any of the material is issued and used. 
Another method provides for charging the material to the 
job at the highest value and using up the higher-priced mate- 
rial first. Still another method provides for charging the ma- 
terial cost on the basis of the prices at which the various lots 
were purchased. This latter method would mean that the 
quantity of material purchased at the earliest date would be 
priced at its particular price until this first lot was eliminated ; 
then the price of the second lot would be used until it too was 
eliminated, and this method would be pursued for each sub- 
sequent lot. 

No matter what method is adopted, when an inventory 



INVENTORY TEST 

Department No 

Article Date.. 



Actual Quantity Price $ Amount 

Book Quantity Price $ Amount 

Difference Quantity Price $ Amount 

Remarks 



Taken by Checked by 

Priced by Investigated by. 

Extended by Approved by 



Form 21. Inventory Test. (Size, 8 x 5.) 



94 



DETAILED FACTORY REPORTS 



of material is taken, it should be figured at cost or market 
value, whichever is the lower, and at that time adjustment 
of the material values upon the various stock records may be 
necessary. 

Inventorying the Material 

When a complete cost system is in operation, the cost 
records provide for a perpetual inventory shown by the stock 
records. If this perpetual inventory is kept, it is then only 
necessary to test the various items of raw material at certain 
periods during the year, at which times Form 21 may be used 
to advantage. The book quantity is then compared with the 
actual quantity and any discrepancies which cannot be defi- 



Listed by 


INVENTORY SHEET 

« Department 

No 

Date 

Extended hv 




Checked by.. 


Added bv 








Priced by 


Approved 


by.. 












1 


Quantity 


Description 


V 


Price 


Amount 









































































Form 22. Inventory Sheet. (Size, 8 x 11.) 



MATERIAL AND MATERIAL REPORTS 95 

nitely located should be adjusted upon the factory records 
and accounts. When a physical inventor}^ is taken of the raw 
material and supplies, the items should be counted, listed, and 
priced at a certain date. All this information may be re- 
corded upon an inventor}^ sheet similar to Form 22. 

Summary of Material and Material Reports 

Form 2^ shows the various steps in the handling of ma- 
terial, and the material reports which are necessary to record 
material costs. 

Procedure in Handling Records 

The procedure in handling each material record may be 
standardized and would then be as follows : 

1. Numbering Reports. A definite series of numbers 
should be allotted to each kind of material report so that the 
office will know whether or not all reports are being received 
from the factory. If any of these reports are spoiled or voided 
in the factory, they should be sent to the office so that all re- 
ports can be accounted for. 

2. Collecting Reports. It is necessary to provide a well- 
planned system of collecting the material reports. It may be 
necessary to collect reports at the end of each day or at the 
beginning of the next business day, or even several times dur- 
ing the day at such times as the factory messenger makes his 
usual rounds. 

3. Examining Reports. All material reports which are 
received at the factory office must be examined to see that they 
are properly numbered and dated, and that they contain a 
proper description of the material to which they relate. They 
should also be examined to see that they are properly receipted, 
signed, and approved. 

4. Pricing Reports. The material reports which record 



96 



DETAILED FACTORY REPORTS 



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MATERIAL AND MATERIAL REPORTS 



97 



the information as to costs must be priced, these prices being 
obtained from the stock cards or other price records. 

5. Calculating Reports. The material reports which con- 
tain the information as to costs must be calculated so that this 
information can be properly posted to the various cost-sum- 
marizing records. 

6. Posting to Stock Records. All material reports which 
show the receipt of material and issuance of material must be 
posted upon the stock records, so that the movements of each 
item of raw material can be shown upon these stock records at 
all times. 

7. Posting to Cost Records. The material reports which 
contain the information as to material cost must be posted to 
the various cost records — under the order method of cost-find- 
ing, to the definite cost records of each job or order; under the 
process method of cost-finding, to the particular cost record 
of the definite process or article affected. 

8. Marking Accounts to be Charged and Credited. Ma- 
terial reports which record costs give the amounts to be 
charged and credited to the various accounts, and upon these 
reports must be entered the information as to the accounts to 
be charged and credited. 

9. Summarizing and Proving for Accounts. After the 
information has been entered upon the material reports as to 
the accounts to be charged and credited, they should be sum- 
marized so that the total charges and total credits affecting 
various accounts may be ascertained. 

10. Filing Reports. After the information upon the re- 
ports has been transferred to the proper summarizing records, 
they may be filed. It is well to provide for filing each kind of 
report in a distinctive file; i.e., the material requisitions should 
be filed separately, also the bills of material, etc. It is advan- 
tageous to file these reports, in most instances, according to 
the report numbers. 



CHAPTER VII 

WAGE SYSTEMS 

Kinds of Wage Systems 

The form of labor reports (to be discussed in the follow- 
ing chapter) will depend largely upon the wage system used 
in a particular industry. As it is necessary for a cost account- 
ant to be familiar with the various kinds of labor reports and 
devices for recording the cost of labor, it is equally necessary 
for him to be familiar with the various methods of paying 
wages. Therefore, the wage systems which are most com- 
monly employed will be explained briefly in the present chapter. 

No one system of wage payment can ever be recom- 
mended as the best for all conditions. Each has its charac- 
teristics which are peculiarly suited to some conditions, and 
at the same time impossible of consideration under other con- 
ditions. The various methods of paying wages considered 
here are as follows : 

1. Day-rate system 

2. Piece-work system 

3. Differential-piece-rate plan 

4. Premium system 

5. Bonus system 

6. Contract system 

7. Profit-sharing plan 

8. Stock-distributing plan 

Several other wage systems, not so well known but suc- 
cessful under some conditions, are also briefly described in the 
consideration of those enumerated. 

The foundation of these systems is either the time 

98 



WAGE SYSTEMS 



99 



consumed or the quantity of work done. In other words, the 
"time" or the "piece" must furnish the basis for any of the 

systems mentioned. Each of these designated plans is sub- 
ject to modification, and therefore there are many forms of 
time and piece methods of paying wages, as well as various 
forms of premium and bonus plans. The bonus and premium 
plans are known by various terms, and are often named after 
the person who first installed them or tried them out. 

Day-Rate System 

The day-rate system provides for paying each workman 
a predetermined sum for a certain number of hours' work. 
Therefore, either a day wage is established, which is the 
amount of wages a man receives for a day's work consisting 
of a definite number of working hours; or an hourly rate may 
be established which, multiplied by the hours in the working 
day, gives the daily wage. The wage rate under either plan 
depends upon: (i) the skill called for; (2) the locality in 
which the plant is placed; (3) the demand for labor; and 
(4) other special labor conditions which may exist at the time. 

The day-rate system is the one most commonly used, 
and is the original method for paying wages. However, since 
all other plans have been devised in an effort to get away from 
it, it is fair to assume that there are gross defects in the sys- 
tem as it stands. 

Disadvantages of Day-Rate System. The principal dis- 
advantages of the day-rate method of paying wages may be 
summarized as (i) lack of incentive to effort, and (2) diffi- 
culty of finding labor costs. 

Lack of incentive on the part of the workmen is tlie one 
thing that has caused the failure of the day-rate system of 
paying wages. The workman has little or nothing to gain by 
doing his best, putting his heart into his job, and exerting him- 
self. He is kept up to a certain dead level of performance by 



lOo DETAILED FACTORY REPORTS 

the fear of losing his job, and this is his only incentive to effort. 
Why should he do more than the man next to him when they 
are both paid alike ? This sort of reasoning may not apply to 
the one man in a thousand who by sheer exertion forges ahead 
of his fellow-workers, but it does apply to the great mass of 
workers in manufacturing industries. The result is shown in 
both the small quantity and poor quality of the output. 

The difficulty of finding labor cost under the day-rate 
system of paying wages is principally due to the fact that a 
uniform labor rate per day, or per hour, does not always in- 
sure a uniform labor cost per article. The wage rate may 
remain the same, but the product and its labor cost may vary 
from day to day, and often this variance is material when 
comparison is made of the work done by different men. 

Applicability of Day Rate. There are classes of labor, 
however, for which no other kind of wage system is practicable. 
Where the work is purely a function of time, as in the case of 
firemen, watchmen, instructors, foremen, factory clerks, etc., 
the simplest and most practicable method of paying wages is 
the day- or time-rate system. The work of repair men and 
men who plan and construct special machinery is also usually 
paid for by time because of the difficulty of reducing such 
work to any kind of piece basis. In general, indirect labor is 
more suited to payment by time than direct labor. 

Piece- Work System 

A piece-work plan is a system of paying wages on the basis 
of the amount of work done. A rate is established for the 
various operations incidental to the production of an article, 
either as a result of past experience or by means of a special 
test. Under this plan, the employer makes what he considers 
a fair estimate of the time required for each operation, or 
makes a special test, and then bases the piece-work wages upon 
the results of this estimate or test. If the rate is fair, the entire 



WAGE SYSTEMS lOI 

arrangement looks so equitable that it may be surprising to 
learn that in many cases friction and dissatisfaction have arisen 
from its use. In answer to the question as to why this should 
be so, an imaginary case may be considered, which, however, 
is based on actual experience. 

An employer, having decided to introduce the piece-work 
system in his business, sets out to determine the allowance 
or rate he should make on each piece of work. He and his as- 
sistants watch the men and their work for some time ; then he 
makes what he considers a fair allowance for the increased 
production that he expects will follow under the new plan, and 
waits for results. Under the stimulus of payment propor- 
tioned to effort, the rate of production soon shows enormous 
gains and the employer frequently finds that production, in- 
stead of increasing according to the low per cent he allowed 
for in determining the new rates, has increased 50%, 60%, or 
has even doubled. As a result, men who were earning, say, 
$2.75 per day, are soon earning $4 or more. 

By this time the employer is likely to think that his em- 
ployees cheated him in the beginning, and as a result of this 
are now receiving altogether too much pay ; so he proceeds to 
cut the rate per piece, and then trouble with his workmen 
begins. They, on their part, soon discover that they are be- 
tween two fires; if they produce too little their wages are 
small, and if they produce too much the rate is cut, after 
which they must continue to work harder and receive no more 
pay than formerly. The natural result of this is an agree- 
ment between the workmen in each class to limit their pro- 
duction to a certain amount which they consider safe. At 
this point the piece-work system breaks down and fails in the 
purpose for which it was introduced. 

In the above instance, the conflict of interests between 
employer and employees is evident. The employer is working 
for the largest possible results for a given wage scale, and 



I02 DETAILED FACTORY REPORTS 

the men are working to receive the maximum wager> for their 
time and work. The employer, in fixing the piece rate, does 
not anticipate that wages will increase much over what they 
were before, or at least not in the same proportion as the pro- 
duction increases ; so he fails to see his real gain by the change 
of method. The workmen, on the other hand, consider that 
they have been exploited by the cut in the piece rate and are 
correspondingly bitter over the situation. 

It is clear that the critical point here lies in the rate. In 
the example given, the employer was ignorant as to just what 
the men could do; and this is the underlying cause of trouble 
in nine cases out of ten. To establish a satisfactory piece- 
work system it is essential to set such a rate that, barring ex- 
cessive business depression or some equally unusual condition, 
it can be successfully maintained. If the employer wishes to 
approximate maximum production, he must be prepared and 
willing to pay more than the ordinary day rate he paid before; 
and no piece-work plan will attain its object unless he takes 
this stand. If he can afford to pay a certain amount for the 
making of an article now, he can surely afford to pay the 
same amount per article when a larger number are produced 
per day. This is all the more so because the indirect expenses 
are increased comparatively little by the increased production 
in a given period of time, and as these expenses are distributed 
over a larger number of articles produced, the cost of each 
article is, therefore, proportionately decreased. 

Method of Fixing Piece Rates. The first step necessary 
to determine the'proper rate is to get true records of the work 
that can be done. In the matter of small, or wholly machine- 
made articles this is not dif^cult. If the operations are com- 
plex and include much handling of the material, it will be nec- 
essary to separate the whole process into simple operations 
and fix a time for each. The sum of these time rates, plus a 



WAGE SYSTEMS 103 

percentage for unavoidable delays, will determine the time to 
be taken on the article as a whole. These analyses are all- 
important, as experience has shown that they afford the most 
accurate and practical method of fixing a fair piece rate. The 
more carefully the rate is fixed in the first instance, the less 
the likelihood of disagreement later. 

Differential-Piece-Rate Plan 

The differential-piece-rate plan is a specialized piece-work 
method modified by an application of time rate to the work. 
The idea is to pay a fixed piece rate up to a certain amount of 
production in a given time, and, if by rapid work the employee 
can produce more than that amount, to pay him a higher piece 
rate, either on the whole amount produced or only on the out- 
put above the standard set. The considerations and cautions 
mentioned in the straight piece-work plan are all applicable 
here, and with double force, since the ideas are the same but 
emphasized. 

The differential-piece-rate plan is specially devised to 
speed up production where the indirect expenses are high in 
proportion to material and labor costs. To get the best results 
in such a case the productive capacity must be made as effec- 
tive as possible, even at a higher payment for labor cost. What 
is lost on the high piece rate will be more than made up by the 
distribution of the large amount of indirect expenses over an 
increased output. 

The point of great importance in the differential-piece- 
rate plan is the making of a fair rate at its introduction. An 
ill-judged rate at this time may be fatal and the utmost skill 
and judgment are necessary to guard against such a mistake. 
The plan also calls for a well-organized supervising corps, the 
actual increase of cost for this depending entirely on local 
conditions, the nature of the shop, and the organization. 



104 



DETAILED FACTORY REPORTS 



Premium and Bonus Systems 

The premium system, together with its modifications, dif- 
fers from piece-work methods in basing the wages primarily 
on a time rate instead of on the quantity produced, and then 
paying extra wages for time saved in the operations. It re- 
sembles piece-work in that it presupposes a time rate on the 
process of manufacturing single articles, or on the separate 
steps in such processes. The fact that it guarantees a mini- 
mum wage places it in a more favorable light before employees, 
and often results in less opposition on their part to its intro- 
duction than they show toward the piece-work plan. 

Linked to the premium plan and related to it in general 
principles, are the several forms of bonus plans. In each of 
these plans there is an increase of pay as the time to do a defi- 
nite amount of work is shortened; but instead of being cal- 
culated directly from the time saved, it takes the form of an 
increase in the hourly wages for the time actually spent, the 
rate depending upon the percentage of time gained and in- 
creasing in proportion. 

The simplest form of bonus system is to pay each work- 
man a daily wage plus a piece rate on each unit in excess of a 
specified minimum. Thus, a laborer receives $1.50 a day for 
shoveling earth, and on each cubic yard in excess of 15 cubic 
)'ards per day he receives a bonus of 7 cents per yard. If he 
shovels 25 cubic yards, he receives $1.50 plus $.70, totahng 
$2.20 for his day's work. 

The differential-bonus system is much the same, except 
that there is an increasing scale for increasing performance. 
As an example, the workman might receive 7 cents bonus for 
every cubic yard above 15, and an additional 7 cents bonus for 
every cubic yard over 20. His day's pay for the work men- 
tioned above would then be $1.50 plus $.35, plus $.70, or $2.55. 

The Gantt system of differential payment is known as 



WAGE SYSTEMS IO5 

"Task Work with a Bonus." A high standard is set, but one 
entirely possible of attainment. The workman receives a regu- 
lar day rate and in addition, if he reaches the standard, he is 
paid a bonus, which may be 25^0 or 33 1/3% of his regular 
wages. This system seems to have worked out well in prac- 
tice ; and it is especially recommended as a good transition 
step from the old day rate to some form of piece-work. 

A very important feature of the Gantt plan is the bonus 
that the foreman gets for every man under him who makes his 
bonus. Thus, if a foreman had twelve men under him and 
eight of the twelve made their bonus, the foreman would get, 
say, 80 cents bonus, or 10 cents for each man. The result in 
practice has been to make the foreman a teacher of the men, 
invariably giving his attention to the men below grade in 
order to get them up to bonus standard. 

In the "stint" system the appeal is made to the workman 
by a gift of all the time he may save. A certain output is 
assigned as a day's work. If he does it in less time, say 7 
hours, he has earned his wages and is free to go home. 

The names "merit," "standard operation plan," "gain- 
sharing," and others, are sometimes given to wage-payment 
plans worked out in particular shops or industries. If they 
differ at all from plans here described, it is only in details 
devised to meet particular conditions. 

Since the plans described as "premium" or "bonus" are 
so closely related in object and principle, they may be grouped 
together for comparison with other methods. 

Introduction of System. In introducing a premium or 
bonus system, the same caution must be observed as with the 
piece-work systems. It is essential to be quite sure of the cor- 
rect standard before the step is taken, if the disastrous results 
that have followed too high piece rates are to be avoided. If 
an error is made on the side of too high a scale, it is less costly 
than in piece-work, because the employer is not working on so 



i(y> DETAILED FACTORY REPORTS 

narrow a margin ; also the effects of such an error would be 
more evenly divided. 

Contract System 

Under the contract system each employee is regarded as a 
contractor who has a given time in which to finish a definite 
job. As in the case of the stint system, if he gets through 
beforehand he has earned his wages, but instead of leaving 
he undertakes a new contract. In some cases he is penalized 
if his work is not done in contract time. 

When the units of work are large, the foreman often be- 
comes the contractor, and becomes responsible for the comple- 
tion of the job. There is a wide amount of freedom in the 
arrangements for wage-paying and profit-making between him 
and the management. Under the contract system in its simple 
form, the contractor hires his own men and arranges the work 
as seems best to him, while the company allows him a certain 
amount for the job. Anything that he saves out of this goes 
to him as profit. Strict inspection of his work is necessary, 
of course, to hold him up to the proper standard. 

A very common instance of a contract system of paying 
wages is in the building trade, where the main contractor has 
certain sections of the work done by sub-contractors. In the 
garment manufacturing industry, also, the contract system of 
paying wages is used where outside laborers do certain opera- 
tions upon the various garments manufactured. 

Profit-Sharing and Stock-Distributing Plans 

The profit-sharing plan, as its name implies, provides that 
the workman shall share in a certain percentage of the profits 
of the shop or factory as a whole. The stock-distributing plan 
makes the employee a part owner in the business, and so gives 
him an interest and incentive to use his best efforts for its 
welfare. 



WAGE SYSTEMS 1 07 

A special form of profit-sharing which has proved suc- 
cessful in operation, though it can be used only under special 
conditions, consists in setting a price on every article produced 
under the supervision of the factory management. The fac- 
tory is charged only with such expenditures as relate directly 
to the production of the articles and is credited at the fixed 
scheduled prices for articles produced whether they are sold 
or not. At the end of the year, or whenever an actual in- 
ventory is taken, the factory account in the ledger shows the 
difference between the actual cost and scheduled prices — in 
other words, the factory profit. This profit is then distributed 
among the foremen of the various departments and sometimes 
among the employees as well, according to the rate of pay and 
total wages of each. A penalty is provided for poor attend- 
ance and other penalties of various kinds may be incorporated 
in the plan, according to the conditions under which it i? 
operated. 



CHAPTER VIII 

LABOR REPORTS 

Classification of Labor 

In the majority of manufacturing industries the direct- 
labor cost is more readily determined than is the cost of the 
direct material. This is especially true when the piece-work 
wage system is in operation, as under such conditions the 
direct-labor cost can be computed without any further detailed 
analysis or compilation than that involved in the operation of 
the wage system. 

As a matter of working convenience, the various labor 
operations should be classified and a well-defined term be given 
to each operation. In addition to this, it is often advisable 
to provide symbols or numbers, so that the different opera- 
tions on each article manufactured are definitely designated 
both by operation name and by operation number or symbol. 
This is specially important where the product manufactured 
is standard and the operations on the products and parts are 
continuous from day to day. 

Outside and Inside Labor 

Two classes of direct labor common in manufacturing 
establishments are: (i) outside labor, (2) inside labor. 

Outside labor is that which is performed outside the par- 
ticular manufacturing plant, as in the garment industry, where 
much of the hand embroidery work, and dyeing and bleaching 
operations are done by persons who do not form part of the 
regular factory force. In recording labor costs, provision 
must be made for both outside and inside labor where both 
exist. 

iog 



LABOR REPORTS 



109 



Direct and Indirect Labor 

Labor is further classified into: (i) direct or "produc- 
tive" labor, (2) indirect or "non-productive" labor. 

The present chapter deals mainly with direct labor costs 
and reports, as this is one of the prime elements of cost. In- 
direct or non-productive labor is treated in later chapters which 
deal with overhead. 

Direct Labor Reports 

Labor reports may be divided into two classes : ( i ) re- 
ports used for pay-roll purposes] ; (2) reports used for cost 
purposes. 

There may be, and frequently are, combinations of these 
two classes of reports whereby one report will answer both 
purposes, being used first for pay-roll work and then for cost 
work. 

When separate reports are used for each of these pur- 
poses, they should be differentiated by distinctive designa- 
tions. Reports used for pay-roll purposes are often termed 
"Time Reports," whereas reports used for cost purposes only 
are more frequently known as "Work Reports." Time and 
work reports are also often designated by such terms as "Job 
Tickets," "Work Tickets." "Day- Work Reports." "Piece-work 
Reports," "Laborers' Reports," and "Factory Employees' Re- 
ports." 

Before taking up the form of time and work reports, the 
time and general method of reporting labor requires considera- 
tion. 

Time of Reporting Labor 

The time of reporting labor depends to a large extent 
upon the pay-roll system used in a particular plant. This is 
usually established and takes precedence, the cost accounting 
requirements conforming to pay-roll requirements. In other 



110 DETAILED FACTORY REPORTS 

words, the pay-roll period usually determines the time of re- 
porting labor costs by the factory employees. Wages may be 
paid weekly, twice a month, monthly, or shortly after comple- 
tion of the jobs, orders, or articles, and reports may be turned 
into the ofifice from the factory at these times. Where it is 
practicable to report labor daily this should be done, especially 
in factories or industries where a large number of employees 
are working. In those cases where the employees are paid 
after the completion of a certain job, order, or article, it may 
only be necessary to have the labor reported at such time as 
the particular work is completed. 

Method of Reporting Labor 

Labor usually constitutes the most important element of 
production cost, and small variations in the methods of hand- 
ling the men and their reports lead to great differences in re- 
sults. The importance of the matter is evidenced by the large 
number of mechanical devices made for the purpose of regu- 
lating labor, and for gathering and compiling labor cost, such 
as time clocks, time stamps, patent time cards, and mechanical 
labor cost recorders of many different styles. While the writ- 
ing of the reports by hand is the most common practice, it is 
sometimes contended that this method is unreliable, especially 
if the reports are made out by the workers themselves. If, 
however, the records are prepared by a competent clerk, even 
though by hand, accurate costs can undoubtedly be established. 
Where mechanical devices are used, it is clear that they elimi- 
nate the imperfections of labor reports prepared by hand; 
but even mechanical devices may be tampered with and thus 
falsify the cost figures unless the mechanism and records are 
carefully inspected. 

The complex and variable conditions which exist in man- 
ufacturing industries call for many different methods and 
forms for reporting and recording labor costs. It is often 



LABOR REPORTS III 

necessary to use several different kinds of time and labor re- 
ports in the same factory according to the different require- 
ments of the various operating departments. So far as pos- 
sible, standard sizes of time reports and standard methods of 
reporting labor costs should be adopted. The numerous me- 
chanical devices on the market have, to a large extent, affected 
the standardization of the forms and methods of reporting 
labor. 

Written reports may be made for: 

1. Each individual employee. 

2. Small groups of employees — often termed "gangs." 

3. Large groups of employees, including employees of 

entire operating departments. 

These reports may include the time and work done upon 
all the jobs, orders, articles, or processes handled during the 
period of time for which the report is rendered; or separate 
reports may be made showing the time and work done upon 
each job, order, or article, or for each process. 

All labor reports made by factory employees should be 
approved by a foreman or other official and the method of 
recording this labor should be properly supervised so that true 
and accurate costs may be obtained so far as possible. 

The successful operation of any system of reports de- 
pends largely upon the simplicity of the records used and the 
clearness with which their operation is explained. Clerical 
labor on the part of factory employees should be reduced to a 
minimum so as not to take up the time of employees more than 
is absolutely necessary, and whatever writing is required 
should be simplified as much as possible by reducing it to the 
entry of a few figures. 

In many lines of manufacture, the conditions are such 
that a workman may spend only a few minutes on a single job. 
In such cases it is not practicable to charge this direct labor 



Iia DETAILED FACTORY REPORTS 

cost specifically to the individual job, order, article, or process, 
and a plan must then be arranged for its distribution over a 
number of orders. In Chapter V, which deals with factory 
orders, the method of handling numerous small orders is taken 
up. 

Verbal labor reports are inadequate and unsafe, and 
should be discouraged in all cases if correct costs are desired. 
Employees are sometimes permitted to report their time ver- 
bally to a department timekeeper who makes the written rec- 
ord, but this is unsatisfactory and unreliable. The tracing of 
a particular item in dispute is then difficult and often leads to 
unnecessary argument and disagreement. 

Requirements of Labor Reports 

The principal points to be considered in choosing or de- 
signing labor reports are covered by the answers to the follow- 
ing questions : 

1. Is the form to show productive labor only, indirect 
labor only, or a combination of both ? Wherever it is possible 
to do so, indirect or non-productive workers should report 
their time upon separate forms. However, if indirect or non- 
productive time appears upon a productive labor report, pro- 
vision must be made for summarizing this element of over- 
head so that it may be included among the factory indirect ex- 
penses and be distributed properly. 

2. Is the labor report to show time only or both time and 
cost? Factory employees engaged on productive work should 
be required to report only the time spent upon the particular 
job, order, or article, and should not be asked to calculate 
costs. A clerk stationed in the operating department may 
calculate the costs upon the labor reports before they are sent 
to the office. 

3. Is the labor report to show the time daily, weekly, 
twice a month, or monthly? The pay-roll system in use will 



LABOR REPORTS 113 

give the answer to this question. Before designing any de- 
tailed form of labor report, the method of paying wages to the 
factory employees should also be given careful considera- 
tion. 

4. Is the labor report to be filled in by a factory employee, 
a clerk, or will a mechanical device be used ? As already sug- 
gested, handwritten reports are likely to be inaccurate, and 
also a certain proportion may be "doctored" by unscrupulous 
employees. Another important fact is that the writing up of 
records diverts productive time to clerical labor. Mechanical 
devices do away with these objections to a large extent. While 
the installation of mechanical equipment may be costly at first, 
it saves time and trouble and proves to be less costly in the end. 
This is especially true if the factory is of any size or the work 
is complex. 

5. Is the report to be used by individual employees, 
"gangs," or department groups? In small factories a single 
combination report may be used for all men doing the same 
class of work. This report can so be arranged as to provide 
all the necessary information for pay-roll purposes as well as 
cost-finding purposes. In large manufacturing industries, 
however, it is often necessary to provide a separate time report 
for each employee. 

6. According to the wage system in use, what informa- 
tion, in addition to time, is required upon the labor report? 
The answer to this question depends upon whether the em- 
ployees are paid for "time" or for "piece." If the day-work 
or premium system is in operation, it may only be necessary 
to show the time. If the piece-work plan or bonus plan is 
used, the report should show quantities and time. In both 
cases the cost and amount of wage is left to the cost clerk and 
pay-roll clerk. When a combination system of paying wages 
is in use, an additional column upon the report gives the 
necessary information as to cost and total wages. 



114 



DETAILED FACTORY REPORTS 



7. Is the labor report to show the time for each job, order, 
or article, or for several? The labor report may provide 
spaces upon the one form for recording the time and work 
done for the several jobs, orders, or articles worked upon dur- 
ing the day, or it may be more advantageous to have separate 
reports in each case. 

To sum up, it may be said that the method of reporting 
labor should be so devised as to ascertain the cost of any job, 
order, or article as a whole or any part thereof, or on any oper- 
ation or process, with the least possible amount of writing or 
figuring on part of the employees. 



DAILY LABOR REPORT 

Department Date 

Employee's Name No 

Occupation Machine 


Order 

No. 


Description of Work 


Time 
Started 


Time 
Stopped 


For Office Use 


Elapsed 
Time 


Amount 


V 



















































































Approved Entered on Summaries. 

Wage Rate Posted to Cost Sheet 



Form 24. Daily Labor Report. (Size, 4 x 6.) 



LABOR REPORTS 



"5 



Form of Time Report 

All time reports should be dated and properly numbered. 
They should contain columns or space for recording informa- 
tion as to the exact nature of the work done, that is, the desig- 
nation of the job, order, article, or operation. Columns should 
also be provided to record the quantity produced, the period 



DAILY PIECE-WORK REPORT 

Department Date 

Employee's Name No 

Operation Machine 










1 


Article 


V 


Quantity 


For Office Use 


Rate 


Amount 


V 



















































































































Approved 

Entered on Pay-Roll 


Entered on Summary.. 
Posted to Cost Sheet 















Form 25. Daily Piece-Work Report. (Size, 4 x 6.) 

of time required to produce it, and the rates and amounts of 
wages in dollars and cents. The information as to rates and 
wages is supplied in the office. 

It is also important to provide for the approval of some 
person in authority, and all reports should be examined and 



ii6 



DETAILED FACTORY REPORTS 



O K'd by this person before they are sent to the office. 
Furthermore, where labor reports are used both for pay-roll 
and cost purposes, it is often necessary to provide columns for 
checking the postings, so that an examination of the reports 
will show whether or not the information has been properly 
transierred to the pay-roll and various cost summaries. 

As previously stated, time reports and labor reports have 



Description of Work., 

Employee's Name 

Operation 



JOB TICKET 

Order No 

No 

Dept. No Machine No.. 



QU.^'TITIES 



Good 

Defective. 
Total 



Time 



Stopped. 
Started... 
Elapsed.. 



Wages 



Piece Rate. 
Time Rate.. 

Amount 



Approved Cost Sheet Entry. 

Pay-Roll Entry Summary Entry.... 



Form 26. Job Ticket. (Size, 5 x 3.) 

become more or less standardized. A few of the simplest 
forms are: the daily labor report (Form 24), the daily piece- 
work report (Form 25), and the job ticket (Form 26). In 
the light of the preceding explanation, the operation of these 
forms will be readily understood. They may be developed by 
the addition of further columns and spaces for recording such 
special information as may be required for the particular cost 
and pay-roll system. 

In small plants where conditions are simple, it is often 



LABOR REPORTS 



117 



practicable to combine labor reports with the production order, 
by providing the latter with a column for collecting informa- 
tion as to the amount of productive time spent upon the work 
covered by the order. Under complex manufacturing condi- 
tions it is impossible to use a form of this kind to advantage. 

Pay-Roll Exception Report 

Labor reports should be made for every factory employee, 
but in the usual course of events some employees will be ab- 



PAY-ROLL EXCEPTION REPORT 

Department 

Date No 

To Pay-Roll Department & Cost Office: 

All employees in my department were present full time with the 
following exceptions: 



Foreman 



Employee's 
No. 


Employee's Name 


Remarks as to 
Irregularities 




















































Noted on Pay-] 


Roll 


Noted on Cost 


Summaries 







Form 27. Pay-Roll Exception Report. (Size, 5 x 8.) 



Il8 DKTAILED FACTORY REPORTS 

sent, others will be tardy in arriving at work, while others will 
leave for an hour or two during the day or before closing time. 
Information as to the tardiness and absence of employees 
should be reported to the office by a foreman or department 
head upon a pay-roll exception report (Form 2y). It is true 
that both the time-clock records and the employee's labor re- 
port should show this information, but in order to call the 
particular attention of the cost department and pay-roll depart- 
ment to these irregularities, they should also be reported upon 
the pay-roll exception report. 

Pay-roll exception reports should be numbered and dated 
and show the department in which they originate, the em- 
ployee's name and number, and all irregularities as to tardiness 
and absence from the plant. Such a report assists the cost 
department when summarizing the productive labor for the 
purpose of comparing its cost with the total amount of wages 
paid as shown by the pay-roll. 

Labor Transfer Reports 

Though employees usually work in their own depart- 
ments, it may be necessary to transfer some of them to another 
department. When such temporary transfers are made, 
it is not necessary to change the men's numbers and 
positions on the pay-roll, but a notification should be sent to 
the office so that their wages may be charged to the department 
in which they are working. 

The transfer of men from one department to another is 
generally reported upon a labor transfer report (Form 28). 
This should be properly dated and numbered, should show the 
department in which the man is usually engaged and the de- 
partment to which he has been transferred, and contain an 
approval of the transfer by some person in authority. It may 
be necessary to provide columns on the report for recording 
information as to time, quantity of work done, and its cost 



LABOR REPORTS 



119 



LABOR TRANSFER REPORT 

Department 

No 

Date 


Employee's 
No. 


Name 


Transferred to 
Department 
































Entered on Cost Summaries: 


Foreman 



Form 28. Labor Transfer Report. (Size, 5 x 3.) 



Rate Records 

It is usual for the wage rates or piece-work rates of fac- 
tory employees to appear upon the labor reports notwithstand- 
ing the fact that in many cases this information is of a some- 
what confidential nature. It is obvious that it is necessary to 
have full and correct information as to the different vcage rates 
of factory employees in both the pay-roll and cost departments. 
The pay-roll clerk must have access to these rate records in 
order to calculate the total amount of wages to be paid, and 
the cost department must use them in working out costs. The 
rate records should be kept up to date and all increases in pay 
and changes in piece-work rates should be sent to both the 
pay-roll and cost departments. Such a record also gives useful 
information when considering the granting of an in«-rease in 
pay to employees whose length of service merits recognition. 



I20 



DETAILED FACTORY REPORTS 



The form used for keeping rate records (Form 29) shows 
each employee's number and name, the date he begins his em- 
ployment, and in the last two columns the dates and the in- 
creased rates when changes are made. The information may 
all be recorded very satisfactorily upon separate 3x5 index 
cards. In some cases it may be more convenient for the cost 



WAGE RATE RECORD 

Department 


Employee's 
No. 


Employee's Name 


Wage Rate 


Date 


Rate 












































Form 29. Wage Rate Record. (Size, 8 x 11.) 



department to keep wage rates in a loose-leaf binder, the record 
for all employees of a particular department appearing on one 
sheet. If this is done, the rate record may then be of letter- 
head size, 8 X II. 

If the manufacturing plant is large, it is often necessary to 
have several copies of these records in use in the pay-roll and 
cost departments. It is then important to see that all changes 
in rates are recorded upon each copy, and, to insure this, the 
series should be numbered. 



LABOR REPORTS 



121 



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122 DETAILED FACTORY REPORTS 

Summary of Labor Reports 

Fomi 30 summarizes the various kinds of labor reports 
and the routine of reporting. 

Procedure for Handling Reports 

The procedure in handling labor reports may be sum- 
marized under the following headings : 

I. Preparing Reports. Labor reports should be pre- 
pared, so far as is practicable, in the office, and distributed to 
the factory employees before they start work in the morning. 
If it is impossible to prepare them in the office, they may be 
m.ade out before work begins, preferably by the factory clerks 
of the operating departments, or otherwise by the factory em- 
ployees themselves. 

The first step in their preparation is to enter the date and 
the report numbers, together with the names and numbers of 
the factory employees for whom they are intended. Under con- 
ditions where work is planned and routed, it is often prac- 
ticable to enter also the job numbers and descriptions of the 
operations to be performed by each employee. 

After the foregoing details are entered on each report 
and work is ready to begin, the starting time is recorded and, 
as soon as a job is completed, the time it is finished, if this in- 
formation is required. If the quantity produced is required, 
this should be entered upon the record by the employee or fac- 
tory clerk and be approved by an inspector. If any additional 
information as to time, quantity, or articles produced is de- 
sired, this should also be entered. An important point to ob- 
serve is that entries should be made either before work starts 
or as soon as possible after its completion. They should not 
be postponed until the end of the day, when the tendency is to 
record the data hurriedly, and too often to rely upon inaccu- 
rate memory. 

The time tickets which are used in connection with time 



LABOR REPORTS 



123 



clocks for pay-roll purposes should also be prepared in advance 
as far as possible. The time in and out is, of course, recorded 
by means of the clocks as the employees enter and leave the 
plant. 

2. Collecting Reports. Wherever it is practicable, the 
labor reports of the preceding day should be collected by fac- 
tory messengers the first thing in the morning. Under com- 
plex manufacturing conditions it may be necessary to collect 
them at intervals during the day, the collection trips being 
timed as required. The reports for each department should 
be kept separately, but, if it is impracticable to sort them in 
the factory, they may be classified in the office. 

3. Examining Reports. The labor reports should be ap- 
proved by a foreman, or a factory clerk who is authorized to 
do so, before they are collected. Afterward they should be 
examined in the office to see that they are properly numbered 
and dated, and that they contain all information required for 
the accurate compilation of the pay-roll, cost sheets, and cost 
summaries. 

4. Pricing Reports. The entry of the rates and amounts 
earned may require reference to rate cards giving the various 
wage rates which may be based on time, piece, premium, or 
bonus. Accuracy in the pricing of the reports is essential, and 
if an inexperienced clerk is in charge of the work his entries 
should be carefully checked. 

5. Calculating Reports. After reports have been priced, 
they are ready to be calculated. This includes the calculation 
of the time or quantity, and the amount of labor cost to be 
charged to each job, order, article, or process. If the day- 
work plan of paying wages is in operation, the total hours 
applied to the various jobs worked upon during the day should ; 
equal the total working hours of the day. 

Experience shows that the calculation is facilitated by re- 
porting any fractions of an hour in tenths or twelfths; in other 



124 DETAILED FACTORY REPORTS 

words, when the tenth of an hour period is used in reporting 
time, a six-minute charge is the lowest amount of time apph- 
cable to any job. The division of the hour into tenths permits 
of decimal calculations which save considerable time in figur- 
ing the reports. 

The amount of wages due may be readily calculated by 
means of a wage rate table. This is compiled by entering the 
various wage rates paid across the top of a sheet at the head 
of separate columns. At the extreme right of the sheet, and 
on the horizontal lines, the various periods of time — five 
minutes, or six minutes, quarter of an hour, half hour, and so 
on — are entered and extended at the various rates, so that 
the wages for any period of time and for each rate are shown 
on the table. 

Reports should be calculated by experienced clerks so as 
to guard against errors. If the amount shown on an individ- 
ual report proves with the daily wage, this may be taken as 
proof of its correctness. To guard against error, however, 
whenever piece-work or premium or bonus systems of payment 
are in operation, it is advisable to check all calculations, par- 
ticularly when no mathematical proof of the figuring is pos- 
sible. 

6. Indicating Accounts to be Charged. After the reports 
have been examined, priced, and calculated, they should be 
arranged or marked so that the proper ledger accounts may be 
debited with the labor costs chargeable against them. This 
is often done by marking each report with an account number. 
If, however, the department number and designation are re- 
corded upon the report, it will not be necessary to make an 
additional specific mark for the account to be charged, as the 
department number and name will give all necessary informa- 
tion for posting. In some instances it is possible to assign a 
definite series of numbers to the employees in each department, 
in which case these numbers indicate on the reports the de- 



LABOR REPORTS 125 

partment in which the employees are worl<ing and the account 
against which their wages are to be charged, 

7. Posting to Pay-RoU and Cost Records. Where the 
labor reports cannot be made to serve the dual purpose of work 
records and pay-roll records, separate time reports should be 
made out for pay-roll purposes, the labor reports being used 
for cost purposes only. In this case the cost department is 
only interested in the time reports in so far as the information 
shown thereon proves at the end of the pay-roll period to be 
in agreement with the time recorded on the labor reports. 

Posting to the cost records consists in entering the labor 
cost upon summaries. The total of this should be in agree- 
ment with the total wages paid, as shown by the pay-roll 
records — the analysis of labor costs being prepared at the same 
time that this proof is established. In addition, the informa- 
tion shown upon the detailed labor reports is posted to the 
cost records upon which is compiled the cost of the various 
jobs, orders, articles, or processes. 

8. Filing. Labor reports may be filed by date, depart- 
ment, employee's number and name, or by factory job, order, 
process, or operation. Any system which permits of a ready 
reference to the reports is all that is required. Under loose 
manufacturing conditions, the records are often tied up in 
bundles and relegated to a shelf in a general storeroom. This 
method of filing entails a considerable loss of time, if it is 
necessary to refer to the reports at a later date, as is frequently 
the case. A factory foreman, for instance, may suspect the 
cost department of errors in posting and cannot be convinced 
until he sees the original labor reports. It is obvious that a 
proper filing system saves both time and trouble. 



CHAPTER IX 

DEPARTMENTAL APPLICATION OF OVERHEAD 

Classification 

As stated in Chapter II, the items of factory overhead 
or indirect charges consist of three principal subdivisions : 

1. Indirect material 

2. Indirect labor 

3. Indirect expense 

These overhead items do not afifect all departments alike 
Some of them apply to all and others only to particular de- 
partments. This chapter covers their application in all cases. 

Indirect Material 

Indirect material usually includes the following: 

1. Material which cannot be applied as a direct charge 

2. Supplies 

3. Scrap or waste material 

4. Small perishable tools and dies 

I. Material Which Cannot Be Applied as a Direct Charge 

While certain classes of material sometimes used in manu- 
facture should properly be applied as direct material, this is 
not always practicable because of the clerical labor involved in 
making the direct charge. (See Chapter II.) In such cases 
these items are preferably treated as a portion of the factory 
overhead under the caption of indirect material. If any of 
the items so treated are used in only one operating department 
of the plant, they are chargeable as part of the overhead of 
that department alone, and not as general overhead. 

126 



APPLICATION OF OVERHEAD 



127 



The treatment of direct material items in this manner 
has been subject to severe criticism by cost experts who appar- 
ently place theory above common-sense. It is not a question 
as to what is the correct method according to theory, but as 
to what is the most practical way. Manufacturing conditions 
cannot be changed nor should they be burdened with unneces- 
sary red tape for the sake of "system." 

2. Supplies 

Factory supplies are usually required in every operating 
department of the plant. They consist of coal, waste, oil, 
brooms, rags used for polishing, and miscellaneous supplies 
peculiar to the operating departments of various lines of in- 
dustry. In large plants the supplies used during the year 
amount to a considerable sum. They are often requisitioned 
for use in each department from a general or supplies store- 
room, which is the most satisfactory method. In small plants 
this plan is not always practicable; here supplies are usually 
purchased for each operating department, the charge to the 
department being made direct when the purchase is made. 
Care must be exercised, however, that too much is not charged 
during any one particular month, as for instance, when a stock 
of miscellaneous supplies is purchased for a six months' period. 
In such a case, a monthly charge must be made. 

When it is impossible to charge supplies directly to de- 
partments, they must be apportioned more or less arbitrarily. 

3. Scrap or Wast<= Material 

Scrap or waste material consists of what is left after grad- 
ing, cutting, trimming, sizing, polishing, or treating the direct 
material. In industries where the amount or scrap is negli- 
gible, its cost may be absorbed in the direct material cost and 
thus be included in the prime cost. Where the scrap material 
is an important item, a careful account should be kept of it in 



128 DETAILED FACTORY REPORTS 

order to guard against the scrapping of too much material. 
Its dollars and cents cost should be determined and charged 
to a Scrap Material account. When the scrap cannot be 
utilized, its cost may be absorbed in the overhead of the par- 
ticular department in which the waste occurs. Often, how- 
ever, a source of income is derived from the sale or other 
utilization of material which has been scrapped. 

If the original cost value of scrap material has been ab- 
sorbed as part of the direct material cost, any income derived 
from its sale should be credited to a "Sundry Income" account 
and be included as part of the additional income in the profit 
and loss statement of the business. However, if the cost value 
of the scrap material sold can be ascertained, this cost value 
should be deducted from the amount received and the profit 
or loss upon this scrap material may then be ascertained sepa- 
rately. Where the amount received from the sale of scrap 
material is small as compared with the total cost of material 
scrapped, the income received on account of its sale may be 
credited to the overhead account, thus reducing the total over- 
head charge applicable to the operating departments. 

Where scrap material is used in manufacturing a by-prod- 
uct or in making other articles for sale, it becomes a direct 
material charge. Its cost should then be ascertained so that 
a complete scrap stock record may be installed. When this 
procedure is followed, scrap will be requisitioned out of stock, 
and its cost will then become a direct material charge to be 
applied to the particular articles manufactured from the scrap. 

Under some manufacturing conditions it is impossible to 
obtain the cost of scrap material, and still this material is valu- 
able for use in the manufacture of other products. This is 
irue in the embroidery industry, where the scrap cloth is used 
to manufacture small embroidered pieces. The cost of such 
scrap cannot be readily ascertained, and therefore, as a rule, 
no cost is charged, as the cloth is obtained from scrap which 



APPLICATION OF OVERHEAD 



129 



is practically worthless for any other purpose. In cases of 
this character, an arbitrary value is sometimes placed upon the 
scrap material. This value is credited against the cost of the 
original article and charged to the material cost of the smaller 
article manufactured. If the articles which have been manu- 
factured out of the larger pieces of cloth cannot be credited 
with the charge made to the cost of the small embroidered 
pieces, the credit must be made to a "Sundry Income" account 
or an account of a similar character. 

4. Small Perishable Tools and Dies 

Where small perishable tools are employed in manufac- 
ture, they may be included as an item of overhead, chargeable 
to the particular department in which they are used. If spe- 
cial tools or dies are purchased or manufactured for a particu- 
lar job, order, or article, the cost of such tools or dies may be 
applied to the cost of the job, order, or article for which they 
are procured. However, if these tools or dies are retained 
and have some value after the completion of the particular 
job, order, or article, an allowance should be made and a credit 
entry passed to the cost of the completed article. This credit 
allowance will usually be made on the basis of scrap value. 

The value of any tools which are purchased or manufac- 
tured for continued use should not be included in the factory 
overhead unless they are perishable in character. Tools or 
special dies which can be used for a long period of time should 
be capitalized at a conservative value. Any deterioration in 
the value of these tools or dies should be considered when 
establishing depreciation rates applicable to capital assets. 

Indirect or Non-Productive Labor 

Indirect or non-productive labor includes the following : 
I. (a) Lost time and idle time of productive workers 
(b) Time of helpers, sweepers, truckers 



£30 DETAILED FACTORY REPORTS 

2. Supervisors and foremen 

3. Superintendence 

4. Inspection (when not considered as a direct labor 

charge) 

5. Factory clerks 

6. Employees on defective work 

7. Employees on experimental work 

In some manufacturing industries all such labor is 
grouped under the one caption "Indirect Labor," and there- 
fore, whenever it is necessary to investigate an. increase in 
indirect labor expenditures, a detailed analysis is necessary 
in order to ascertain the component parts of these expenditures. 
This condition can only be remedied when a basis for true 
comparison is obtainable, and such an important overhead 
item as indirect labor should be classified very completely 
according to its constituent parts. In small manufacturing in- 
dustries it may not be necessary to have as elaborate a classi- 
fication of indirect labor, and in these cases the foregoing 
classification may be somewhat abridged. 

Where bonuses form part of the wage payment for either 
productive or non-productive labor, it is often impracticable 
to charge these payments to the accounts to which the original 
wages were charged. Where the bonuses are based directly 
upon increased production, they should be charged as part 
of the regular wages. If the bonuses are merely intended as 
an incentive to regular attendance or increased production, the 
amounts so paid should be charged as factory overhead to the 
departments in which the employees are engaged. If they can- 
not be so apportioned, they should be charged to a special 
account and distributed over the various departments affected, 
upon some arbitrary basis. 

Wherever bonuses are in the nature of gifts and are ex- 
ceptional, they should not be treated as part of the factory 



APPLICATION OF OVERHEAD 



131 



overhead, but should be considered either as part of the ad- 
ministrative expenses of the business or as a distribution of 
profits. 

I. (a) Lost and Idle Time of Productive Workers 

The productive employees of manufacturing plants often 
lose considerable time while awaiting assignment to definite 
pieces of work, or while repairs are being made in the fac- 
tory, or because of unavoidable interruptions to the routine 
of production. The idle or non-productive time which is the 
result of these delays should be charged to the department in 
which the employees are idle. 

While it is true that as much of the time of employees as 
possible should be applied to some definite job, order, or article 
if actual costs are to be ascertained, this does not mean that 
idle time, lost because of non-assignment of the laborer or 
because of a temporary shut-down of the factory or a depart- 
ment of the factory, should be applied and absorbed as a direct 
element of cost in order to charge all time to some particular 
article. It is far more important to know the amount of this 
idle time than to have all productive time treated as a direct 
element of cost. The wastage of time can only be avoided if 
the time so lost is properly recorded. Labor reports, there- 
fore, should always provide for recording the idle time which 
cannot be charged to orders. 

Under some manufacturing conditions, factory employees 
are often paid an additional amount of wages for overtime or 
for special work. In some cases, this extra wage allowance 
may be properly chargeable as a direct labor cost, but in other 
cases this excess of wages must be absorbed in the factory 
overhead. If overtime work is a common occurrence in a 
large plant and it is impossible to treat it as a direct labor cost, 
the additional wages are properly included as a non-productive 
labor item. 



132 DETAILED FACTORY REPORTS 

1. (b) Time of Helpers, Sweepers, Truckers 

Most manufacturing plants have certain employees who 
devote all their time to work of a non-productive character, 
such as helpers, sweepers, and truckers. The time of such 
employees can only be applied in an indirect manner, and there- 
fore must be considered as part of the factory overhead. As 
far as possible the time of these employees should be charged 
to the department in which they are ordinarily engaged. If, 
however, they are transferred from one department to another, 
it may be necessary for them to keep separate and distinct time 
records for each so that their time will be charged correctly. If 
it is impossible, in smaller plants, to charge the wages of these 
employees directly to operating departments, the total amount 
may have to be distributed as seems most equitable. 

2. Supervisors and Foremen 

The charge for supervisors or foremen in manufacturing 
plants is a more or less fixed item. This charge is very readily 
determined for each operating department when each is super- 
vised by its own foreman or supervisor. Under some condi- 
tions, however, foremen and supervisors devote their time and 
attention to different departments. In such cases an arbitrary 
distribution of the charge may have to be made, unless it is 
possible to establish a time report for these employees so that 
their time may be equitably distributed to each department to 
which they devote their attention. 

3. Superintendence 

Superintendence does not include the items of supervi- 
sion or foremanship, but is restricted to such items as the 
wages paid to the general superintendent, assistant superin- 
tendent, and production manager. These items apply to the 
entire plant and in most industries cannot be localized and 
charged to a particular operating department. Therefore, 



Application of overheae) t^^ 

they should be absorbed in the general operating expenses and 
be distributed to the departments upon some arbitrary basis. 

4. Inspection, When Not Considered as a Direct Labor Charge 

An inspection department is often a necessity in some 
manufacturing plants, in which case the inspection time may 
be treated either as a part of the direct labor cost, or included 
among the factory overhead expenses. If a departmental in- 
spector is employed, the charge could properly be applied to the 
department in which he is engaged. Frequently, however, in- 
spectors travel from one department to another. It is often 
possible to keep complete time and work reports for the actual 
work done by these inspectors so that, using these reports as a 
basis, their time may be charged to particular departments. 

Where there is a general inspection department which 
cannot be treated either as forming part of the direct labor cost 
or as a departmental overhead charge, the cost of its up-keep 
must be charged as equitably as possible to those departments 
the work of which has to be inspected. 

5. Factory Clerks' Salaries 

Factory clerks' salaries include those of clerks who are 
engaged in the operating departments, cost department clerks, 
storeroom clerks, pay-roll clerks, and miscellaneous clerks em- 
ployed in various non-productive capacities. Their salaries 
should be charged to the respective departments with which 
they are connected. The salaries of those who work in the 
productive departments should be charged directly thereto. 
The time of factory clerks who are not wholly occupied in one 
operating department, should be reported so as to permit their 
salaries to be distributed as seems to fit the needs of the case. 

In considering whether a clerk's time is properly charge- 
able as part of the factory overhead, the actual facts in the 
matter must be reviewed. If the work done by the clerk is 



134 DETAILED FACTORY REPORTS 

of an administrative character and has no connection either 
directly or indirectly with the producing of the goods, the time 
should be applied as part of the administrative expense. If, 
however, a clerk is connected with the factory, and assists 
either directly or indirectly in the actual production, his time 
should be absorbed in the factory overhead. 

6. Employees on Defective Work 

The treatment of defective work, as a whole, depends 
upon the nature of the product manufactured and upon the 
amount and kind of defective work. Under some manufactur- 
ing conditions, many slight defects in the product are corrected 
by two or three men who devote all their time to this kind of 
work. In the language of the factory they are called "doc- 
tors," in the sense that they remedy defects in the product. 

Under conditions where standard products are manufac- 
tured, the time of these employees cannot be applied directly, 
and therefore it must be absorbed in the factory overhead. If 
the time of these employees can be applied to a particular oper- 
ating department, it should be absorbed in its overhead. If, 
however, the cost of correcting the defects is a general operat- 
ing expense, it must be arbitrarily distributed over the operat' 
ing departments. 

When the correction of such defective work necessitates 
a considerable amount of extra labor and involves an addi- 
tional routing of the product through the factory departments, 
the defective work should be recorded upon a separate factory 
order and the cost of correcting these defects should be applied 
separately in the same way that the costs are applied to any 
other special order. 

7. Employees on Experimental Work 

Just as there are employees who devote all their time to 
defective work, so there are employees who devote all their 



APPLICATION OF OVERHEAD 



135 



time to experimental work with a view to improving the prod- 
uct, process, or equipment. The salaries of such employees, 
whose time cannot be treated as productive and applied to any 
definite job, order, or article, must be treated as indirect labor 
and absorbed in the factory overhead. 

The time of these experimental workers is sometimes con- 
fined to a certain definite operating department, affecting only 
the articles there manufactured. If, however, this is not the 
case, and the time charge cannot be specifically applied, it must 
be distributed as overhead. 

If the experimental work is costly in character and em- 
bodies the improvement of some one particular process, article, 
or machine, a factory order should be issued for such work, 
and all applicable costs for material, labor, and overhead 
should be charged to that particular order. This will give the 
total cost of the experimental work on that order. After as- 
certaining this, it can then either be capitalized or be charged 
to the operating department or product manufactured by being 
absorbed in the overhead for a definite period of time. 

Indirect Expenses 

The items of indirect expenses which compose the factory 
overhead may be classified as follows: 

1. Rent 

2. Insurance — fire and liability 

3. Taxes 

4. Interest 

5. Power 

6. Light 

7. Heat 

8. Freight and cartage inward, when not considered as a 

part of direct material charge 

9. Over, short, and damage 



136 DETAILED FACTORY REPORTS 

10. Miscellaneous factory expenses 

11. Depreciation 

12. Maintenance, repairs, and renewals 

Items numbered i to 10 will be separately considered in 
this chapter, leaving for discussion in the following chapter 
the important subject of depreciation and maintenance. 

1. Rent 

The item of rent is more or less fixed as to amount. This 
item is applicable to all departments of the business, including 
the selling and administrative as well as the various factory 
departments. The most practical method for the distribution 
of the rent charge is that which is based upon the proportion 
of floor space occupied. Consideration must always be given, 
however, to the more desirable floors and the more desirable 
locations of the different departments. In other words, the 
same rate per square foot should not be used throughout the 
entire plant for every floor. On the contrary, a sliding scale 
should be established so that the various locations throughout 
the plant will bear rates per square foot depending upon their 
desirability. 

When the rent item is fixed, and the space assigned to 
each particular department is also fixed, a schedule of the rent 
charges may then be established; and this fixed schedule may 
be used until changes in the amount of rent, or changes in de- 
partmental space, require a new distribution of this charge. 

When the building is owned, items in lieu of rent, such 
as interest on mortgage and taxes on real estate, may be dis- 
tributed over the various departments of the plant upon the 
basis of the floor space occupied by each. 

2. Insurance — Fire and Liability 

The fire insurance charge includes the amount paid for 
insurance upon buildings, equipment, and merchandise stock. 



APPLICATION OF OVERHEAD 137 

When blanket policies covering insurance on all of these items 
are issued, the entire amount of insurance paid is to be ab- 
sorbed in the factory overhead and it is often difficult to estab- 
lish a basis for the charge to the various departments of the 
plant. The total value of the machinery, equipment, and ma- 
terial stock carried in a department, plus a value for the 
building in which the department is located, usually provides 
a satisfactory basis for the distribution of the insurance charge. 

When separate insurance policies are issued for the stock, 
the buildings, and the equipment, the insurance charge may be 
apportioned more accurately. The insurance of the stock may 
be distributed to the departments upon the basis of the value 
of stock carried in each; that of the equipment, on the valua- 
tion of the equipment installed in the departments; and the 
insurance on the buildings, by some arbitrary method. 

Liability insurance affecting factory employees should be 
included in the factory overhead and distributed according to 
the amount of wages chargeable to each department. 

3. Taxes 

Taxes are varied in character and include local, city, and 
town taxes, state taxes, and United States Government taxes. 
Income, excess profits taxes, and capital stock taxes are not 
proper charges against cost and should not be included in the 
factory overhead. They are deductions from the undivided 
profits and should be so treated upon the financial records. 

Real estate taxes may be considered as payments in lieu 
of rent, and as such distributed to the departments affected 
upon the basis of the space occupied by each. Taxes upon the 
valuation of the machinery and equipment may be distributed 
according to the value of such machinery and equipment used 
in each department of the plant. If these items cannot be 
distributed upon the basis of floor space or value of equipment, 
they must be applied upon some arbitrary basis. 



138 DETAILED FACTORY REPORTS 

4. Interest 

Whenever interest on the value of plant, machinery, and 
equipment is to be treated as part of the cost, it should be in- 
cluded in the overhead of the various departments, the distri- 
bution being made in proportion to the valuation of the equip- 
ment used in each. 

The question of interest in its relation to cost of produc- 
tion has probably been discussed at more length than any 
other subject in cost accounting, and concerning no other sub- 
ject is there such a wide difference of opinion. From statistics 
gathered in this connection, it would appear that of the ac- 
countants who have expressed an opinion on this subject, about 
60% are in favor of, and about 40% opposed to, the inclu- 
sion of interest as a cost of production. It should be noted, 
however, that 90% of the accountants who have specialized in 
cost accounting advocate its inclusion as a part of cost, and 
the same percentage prevails among manufacturers generally. 
The writer's personal opinion is that the full expense of oper- 
ating a plant should be charged against the cost of the product, 
if true costs are to be obtained. As it is just as necessary to 
pay for buildings, land, and machinery as it is to pay workmen 
for manufacturing a product, interest on the capital investment 
should be considered in ascertaining costs, especially where the 
value of the investment required for the manufacture of some 
articles is greater or less than that required for the manufac- 
ture of other articles. 

To illustrate this point it may be assumed that a factory 
is producing articles of different kinds, some of which necessi- 
tate the use of expensive machinery or equipment, while others 
are largely the product of hand labor, or cheap machinery. 
If the different values invested are not taken into considera- 
tion, the distribution of the indirect expenses will not show the 
true variation that exists in the cost. An unequal burden is 
clearly the result of the differences in investment, and, since 



APPLICATION OF OVERHEAD 



139 



these inequalities are a direct result of using different kinds of 
equipment, it seems that interest on the investment in equip- 
ment should be considered as one of the elements of cost. 

Of course, if the equipment is uniform, or if all the out- 
put passes through the same processes, there is no essential 
difference between including interest as a cost or leaving it for 
later consideration when fixing the selling price of the product. 
Since, however, in either case the amount invested must be 
considered in determining the selling price, there still remains 
the necessity of determining the method of calculating the in- 
terest. This may be based on values, or on time, or on other 
conditions of manufacturing. The difference of opinion, then, 
centers on what is the best method of applying this charge to 
the cost; that is, whether it should be included among the 
regular cost items or be added to the cost in a statistical re- 
port,* 

The writer's attitude on this question has, at times, been 
misunderstood. He has never advocated the charging of in- 
terest on the capital invested as a whole, but only on the per- 
manent or fixed assets used in manufacturing; that is, land, 
buildings, machinery, and equipment. He has never advo- 
cated interest on inventories of raw material and supplies, ac- 
counts receivable outstanding, or any other form of floating 
capital investment. Ignoring all economic arguments in con- 
nection with this subject, and confining it strictly to its rela- 
tion to the fixing of a selling price, the writer is firmly of the 
opinion that it is necessary to consider interest in this con- 



*To attempt to cover the arguments for and against the inclusion of interest as a 
cost would require a volume. Readers who wish to study this question will find the 
following refer; '.ices helpful: 

Factory Accounts, by Garcke and Fells, page 140. 

Commercial Organization of Factories, by H. Spencer, page ijo. 

Cost Keeping and Management Engineering, by Gillette and Dana, pages 141 
and 142. 

Factory Organization and Administration, by H. Diemer, page 212. 

Cost Accounts, by L. W. Hawkins, page 109. 

Cost Keeping and Scientific Management, by H. A. Evans, page 37. 

Depreciation and Wasting Assets, by P. D. Leake, pages 53 and 54. 

Bookkeeping and Cost Accounting, by Wm. Kent, page 128. 



I40 



DETAILED EACTORY REPORTS 



nection in order to determine what would be a fair profit in a 
given case. 

Possibly the majority of the opponents of interest as a 
manufacturing cost would not object to its inclusion in the sell- 
ing price. Therefore, the following method of handling the 
problem may be recommended as a compromise between the 
two theories. 

\\'herever it is desirable to include as a cost the interest 
on the capital invested in fixed assets, two special accounts 
should be opened in the ledger : ( i ) Interest Reserve account, 
and (2) Interest Income account. The interest, calculated 
for a current month, is charged as a cost in the same manner 
as any other cost item, while the total interest so charged is 
credited to Interest Reserve account. This account, of course, 
should not include or contain any interest charges which are 
actually paid for borrowed capital. 

At the end of the current month, the amount of interest, 
charged as a cost on the product actually shipped during the 
current month, should be ascertained and charged to Interest 
Reserve account, the offsetting credit being to Interest Income 
account. Any interest items affecting manufacturing costs 
which have been actually paid or received would also be 
charged, or credited, to Interest Income account. The balance 
of Interest Income account would then be credited to profit 
and loss, while the balance of Interest Reserve account would 
represent the interest on goods in process and finished stock. 
When the monthly financial statements are prepared, the Inter- 
est Reserve account is deducted from the inventory of goods in 
process and finished stock as shown in the balance sheet. In 
this way, interest is not included as part of an asset in the 
financial statements, thus answering the principal objections to 
opponents of interest as a cost. At the same time, the prin- 
ciple of charging interest as a cost for the purpose of fixing 
a fair selling price is adhered to. 



APPLICATION OF OVERHEAD 



141 



5-7. Power, Light, and Heat 

Whenever a factory operates a separate power plant, the 
costs of this department should be compiled and ascertained 
separately. The total costs of the power, light, and heat 
furnished to departments are distributed upon the basis of 
the space occupied, and according to the meter readings and 
horse-power hours of the various machines. When it is diffi- 
cult to separate the charges for light, heat, and power, the 
items may have to be combined. When light and power are 
pui chased, readings and the horse-power of the various ma- 
chines operated again furnish the necessary data for the distri- 
bution of these charges. In this case the heat is usually gen- 
erated within the plant and its cost can be ascertained sepa- 
rately. The above items should be apportioned arbitrarily 
only when the more accurate information furnished by horse- 
power measurement or meter readings cannot be obtained. 

8. Freight and Cartage Inward 

It is often feasible to treat the item of freight and cartage 
inward as an element of direct cost, by adding it to the ma- 
terial price, and in that manner treating it as a part of ma- 
terial cost. However, under some manufacturing conditions, 
this is not practicable. The item must then be treated as over- 
head and applied to the various departments according to the 
value of the materials and supplies purchased. Freight and 
cartage inward on machinery and equipment should, in all 
cases, form a part of the cost of such machinery and equip- 
ment. 

An objection is often raised to the addition of freight and 
cartage inward to the material cost as this necessitates chang- 
ing the unit price of the material purchased. The price is then 
apt to be a fractional amount. Before the addition, the unit 
price may have been an even amount of dollars and cents, 
thereby simplifying the figuring of material costs. After the 



142 



DETAILED FACTORY REPORTS 



addition much more labor is involved in cost computation. 
Even if it is possible to add freight and cartage inward to 
the cost of direct material, it is not always practicable to add 
it to the cost of suppHes. Supplies are often received in bulk 
and consist of a number of articles. When freight and cart- 
age is paid upon this bulk, it is difficult to distribute the charge 
with accuracy over the various items purchased. Therefore, 
in most cases, freight and cartage paid upon incoming supplies 
must be distributed over departments on some arbitrary basis. 

9. Over, Short, and Damage Account 

In addition to the waste and scrap involved in processing 
material, as previously mentioned, a shrinkage or loss in its 
weight often occurs which cannot be accounted for. All 
shrinkages or losses which cannot be properly explained should 
first be charged to "Over, Short, and Damage" account, and 
then to the department in which the loss or shrinkage occurs, 
if this is possible. Failing this, they may be apportioned in 
any equitable manner. 

Over, Short, and Damage account is often used for the 
purpose of making credits for adjustments which are necessary 
when material increases in quantity for some unknown reason, 
although care should be exercised to see that these increases 
do not offset losses. These should be properly investigated 
with a view to their remedy. In other words, a credit entry 
should not be passed for the express purpose of reducing the 
debit side of the Over, Short, and Damage account. It is 
important to investigate separately all losses charged to this 
account, so that remedies may be applied for correcting defects 
and stopping leaks. 

10. Miscellaneous Factory Expenses 

Some items of expenses, such as system work, cost analysis 
and investigations, and special expenditures which cannot be 



APPLICATION OF OVERHEAD 



143 



classified under any of the headings previously mentioned, are 
often listed as "Sundries" in an analysis of factory indirect 
charges and charged to a "Sundries'' or "Miscellaneous" ac- 
count. This account should not be used as a dumping 
ground for all unclassified items. In practice, Sundries ac- 
count is often found to contain important items of overhead 
the identity of which is hidden in a number of miscellaneous 
charges. The Sundries account should permit of a ready 
analysis, so that the component parts may at all times be inves- 
tigated and any item wrongly included therein charged to its 
proper account. 

Whenever it is possible, miscellaneous factory expenses 
should be charged to the departments in which they originate, 
if a proper departmental overhead rate is to be established. 
Where it is impracticable to charge these items directly to de- 
partments, they must, of course, be distributed on some arbi- 
trary basis. 



CHAPTER X 

DEPRECIATION AND MAINTENANCE 

Depreciation 

Depreciation charges are applied to departments upon the 
basis of the total valuation of the equipment in each. The 
loss of value due to depreciation is undoubtedly one of the 
most difficult of all expenses to reduce to accurate figures, be- 
cause of the numerous factors to be taken into consideration. 
The best method of arriving at the rate for depreciation is 
to estimate the life of the asset in question and then write off a 
certain per cent of its value each year. In fixing the rate, the 
residual value of the asset at the end of the period should 
always be considered. In other words, the total value of the 
article should never be entirely written off, as there always re- 
mains some scrap or sales value. 

Effect of Repairs and Renewals on Depreciation 

One factor of depreciation needs to be noted in particular; 
this is the amount spent for maintenance in the form of repairs 
and renewals. It is clear that whatever is spent to counteract 
the effect of age and use tends to lessen the amount of deprecia- 
tion. Theoretically, if a factory were maintained in its orig- 
inal condition, its maintenance cost would exactly counterbal- 
ance the depreciation. However, this is quite impossible in 
practical operation. Repairs are made only as efficiency re- 
quires. The plant as a whole may be gradually depreciating 
without its efficiency being impaired to any appreciable extent. 
In some cases the renewal of parts may increase the value of 
a machine to a point beyond its original cost, as where ordinary 
cast-iron parts are replaced by steel. This extra expense 

144 



DEPRECIATION AND MAINTENANCE 145 

should not be considered as an offset to depreciation, but as an 
additional investment of capital. Just where the line between 
the two is to be drawn must be determined by the circumstances 
of the case. 

Factors to be Considered in Fixing Rates 

The rate of depreciation depends upon many different and 
variable factors, some of the most important of which. are: 

1. Nature and construction of buildings and equipment, 

together with their condition. 

2. Deterioration of plant in general and of machinery in 

particular, due to wear and tear. 

3. Amount spent for maintenance in the way of repairs 

and renewals. 

4. The invention of new methods or new machines 

which may or may not entirely replace the old 
ones. 

5. Permanency of business, and likelihood of increase or 

decrease in the same. 

6. Amounts previously written off for depreciation. 

7. Obsolescence. 

There are many additional factors, such as amortization, 
peculiar and excessive uses of machines, rate of production, 
idleness of plant, etc., all of which enter into the problem. 

Schedule of Depreciation Rates 

The following schedule of depreciation rates represents 
a classification used by one of the largest manufacturing con- 
cerns in the country. The majority of the rates have been 
determined at various conferences held to consider the ques- 
tion. They are endorsed by the writer as they are the results 
of long and careful study of this subject. The rates apply to 
a, period of one year. 



146 DETAILED FACTORY REPORTS 

Approved 
Rates 
Land: 

Dams and waterways iV2% 

Roadways and sidewalks 4 

Paving and pavements 4-10 

Wells — gas 10 

Wells — water 3 

Buildings: 
Housing: 

Dwellings — frame 3 

Tenement houses 5 

Hotels 5 

Fire-proof: 

Concrete 2 

Brick 21/2 

Brick and concrete floors 2y2 

Main buildings — ^brick and concrete 2-2 '^2 

Steel frame — non-combustible roof, and corrugated 

iron walls 3 

Steel with corrugated sheet iron or steel plate 5 

Corrugated iron — steel frame concrete floor 3 

Reinforced concrete, or steel and tile 2 

Stone, brick, concrete with or without steel, first-class 

stone and brick 2 

Mill or slow-burning buildings — brick, steel, and wood, 

or brick and wood 3 

Non-fire-proof: 

Outbuildings 7V2 

Wood 5 

Substantial wooden buildings 5 

All-wood structures — well built 5 

All-wood structures — cheap material 7V2 

Steel frame — wooden roof, and corrugated iron walls 5 

Steel or corrugated sheet iron with wood 5 

Corrugated iron — wood frame and floor 5 

Corrugated iron — wood frame, concrete floor 5 

Corrugated iron — steel frame, wood floor 5 

Concrete block with wooden roofs and floors 5 

Miscellaneous structures : 

Hose reel and guard houses 15 

Pine swamp (magazines) 2 

Frames, stables, and sheds 5 

Bins — concrete and brick 5 

Bins — wood alone 20 



DEPRECIATION AND MAINTENANCE 



147 



Trestles — steel (not including rails or ties) 3 1/3% 

Trestles — wood (not including rails or ties) 6 2/3 

Docks, piers, and wharves 3 1/3 

Dry docks — basin 2 

Dry docks — floating 5 

Ship sheds 3 1/3 

Fences — wooden 10 

Fences — wooden and wire mesh 8 1/3 

Pump 5 

Retaining walls 2-5 

Tunnels, underground piping, vaults, and general conduits. 5 

Stack — brick 3 

Building Mechanical Equipments: 
Plumbing: 

Inside piping, and water and sewer piping 6 

Heating and ventilation 5 

Sprinklers 5 

Electric light and power wiring: 

Departmental wiring — net additions 6 

Inside wiring 5 

Elevators 5-7Vi: 

Fire alarm and fire prevention apparatus 5 

Refrigeration 7!/^ 

Plant Power and Large Equipment: 

Power machinery 6 

Steam plant equipment : 

Steam power plant, including boilers and piping 6 

Boilers 5 

Boilers — including boiler house equipment such as 
economizers, feed water heaters, injectors, damper 

regulators, etc. (does not include feed water pumps) . . 5V2 

Water purifying plant 51/2 

Engines 5 

Steam turbines 5 

Condensers 6 

Piping 71/2 

Superheaters 5 

Stokers — fixed parts 5 

Stokers — moving parts 20 

Electric plant equipment 6 

Dynamos 5 

Electric machinery — generators 5 

Electric machinery — motors 5V2 

Electric motors and apparatus 10 

Storage batteries 6 



148 DETAILED FACTORY REPORTS 

Sub-station equipment $ 7o 

Switchboards — telephone central 5 

Switchboards — telephone P. B. X 7V2 

Switchboards and wiring 5 

Switchboards, main wiring, and conduit 5 

Aerial lines 5 

Cables — underground (high tension) 5 

Electric wiring 5 

Conduits 2 

Conduits, manholes, and paving 5 

Transformers — station service 5 

Gas and oil plant equipment: 

Engines — gas and oil 7V2 

Fuel oil system 7V2 

Oil lines 5 

Steel gas-producers, piping, etc. — including gas washers, 
gas scrubbers, gasometers, dust catchers, and dust 

collectors 6 2/3 

Brick gas-producers 6 2/3 

Gas supply system 6 2/3 

Gas plant equipment 6 2/3 

Pneumatic plant equipment 6 

Compressed air system 7V2 

Air compressors 5 

Hydraulic plant equipment 6 

Water lines 5 

Pumps 7V2 

Miscellaneous steel mill, forging and machine shop equip- 
ment : 
Steel work — including air, oil, and water tanks, stand 
pipes ; gas, hot, and cold, blast furnaces and bessemer 
plant; scrap drops, crane lunways (when not included 
as part of buildings), bins, racks, poles, foot bridges, 
steel stack, wire screening, drop balls, coke, and ore 
pockets; heating pockets, cribs, skip hoists, ladle rests, 

smoke boxes, etc. ; plate carriers, etc 4 

Stack— steel 8 

Dolomite and lime kilns, rotary nodulizing kilns 6 2/3 

Steel ladles, charging boxes, charging barrows, etc 20 

Cranes — wooden 6 2/t, 

Cranes — electric, hydraulic, steam, and hand power; jib 
and davit; hand hoists, electric hoists, derricks, lifting 

magnets, and charging machines 6 2/^ 

Cars — molds, cinder and hot metal ladle, cars charging 
buggies, transfer cars, ore cars, scale cars, jack cars, 
skip cars, shop and ash cars, core oven cars 10 



DEPRECIATION AND MAINTENANCE 149 

Cars — standard gage and narrow gage used by trans- 
portation department 10 % 

Car transfers, turntables, car dumpers, car shifters, pig- 
casting machines, water sprays, grab buckets, cap- 
stans, windlasses, winches, shear poles, snubbing 

devices, drag-outs, etc 81/3 

Blast furnace stacks, stoves, soaking pits, open hearth, 
furnaces, crucible melting furnaces, hot metal mixers, 
converter vessels, cupolas, open hearth pre-heaters, 

cinder runner, slag spouts, etc 5 

Cupolas, converters, melting furnaces, and accessories. . 5 
Annealing and heating furnaces, ovens, forges, etc. ... 5 

Furnaces 6 

Heating and melting furnaces 6 

Puddle furnaces, electric, air, oil, and welding furnaces, 

cooler ovens, drying ovens, etc 5V2 

Mill machinery — including roll trains, tables, shears, and 
intensifiers, cold saws, hotbeds, cooling beds, straight- 
ening machines, drag-ons, drag-offs, pushers, ingot 
buggies, hydraulic accumulators, cold drawn ma- 
chinery such as draw benches, roll straightening ma- 
chines, etc., hot saws 5^/2 

Exhaust system "jV^ 

Exhaust blower system 7!/^ 

Tanks and reservoirs — steel 4V2 

Tanks and reservoirs — wood 8 

Machinery : 

Machine tools: 

Lathes, slotters, planers, drilling and boring machines; 
milling machines, tool and surface grinders; emery 
wheels, keyway cutters, tapping machines, arbor 
presses, centering machines, squaring machines, hack 
saws, notching machines, buffing machines, test pumps, 
pointing machines, metal band saws, belt lacers, saw 
grinders, etc., die-sinking machines, trimming presses, 
etc., belt cutters, pipe threading machines, car wheel 
presses, saw-setting and filing machines, angle-bench- 
ing machines, cold saw-cutting off machines, etc 6 2/3 

Gun and tool machinery 6 

Cartridge machinery 8 

Tool and shop machinery 5 

Punches, shears, hydraulic and pneumatic riveters; bend- 
ing rolls, straightening rolls, straightening presses, bull- 
dozers, joggling machines, flanging machines, frame-set- 
ting machines, beveling machines, keel-bending ma- 
chines, can brakes, etc., forging and upsetting machines 6 2/3 
Punch presses, bending rolls, power shears, and drop ham- 
mers 6 2/3 



t50 DETAILED FACTORY REPORTS 

Hydraulic forging presses, bending presses, and fluid coni- 
pressers 6 2/1^0 

Hammers — steam, drop, or helve 10 

Shafting, pulleys, hangers, and belting 5 

Belting 7 

Wood-working machinery — including band, jig, and rip 
saws, dovetailing machines, moulding machines, ten- 
oners, mortisers, sizers, wood-boring machines, wood 
shapers, wood lathes, wood planers, universal wood 
workers, carvers and moulders, sanding machines, sur- 
facers, swing saws, scroll saws, jointers and wood cut- 
off saws, embossing press, core box, disc grinders 5 

Miscellaneous machinery: 

Locomotive cranes, steam and electric, steam shovels. . 10 

Coal and ash handling machinery 8 

Hydraulic jacks 10 

Conveyors — coal, ash, and sand, screw conveyors 6 

Skip and stock hoists 6 

Grinding and mixing machines; crushers, pulverizers, 
squeezers, scrap shears, concrete mixers, mud guns, 
jarring machines, tumbling barrels, water cinder 
mills, sand blast machinery, moulding machines, core- 
ramming machines, roller feeders, etc., testing ma- 
chines, vibrating machines, tie rod machines, welding 
machines, etc., magnetic separators, venturimeters, oil 
meters, fans, gages, blow^ers, shaving exhaust system, 
acetylene generators, oil-testing machines, sand 
dryers, oiling systems, sewing machines, locking ma- 
chines, crimping machines, classifiers, thickeners, ball 
mills, roller feeders, revolving screens, flotation nia- 
chines. belt-strapping machines, mechanical mixing 

machines, etc 10 

Pickling washing machines, electric and acetylene weld- 
ing machines 10 

Small Tools : 

All small tools of an asset nature 10 

Miscellaneous Equipment: 
Miscellaneous shop equipment: 

Anvils, forges, bending blocks, surface plates, mandrels, 
porter bars, extractors, track and wagon scales, crane 
scales, portable scales, oil and powder cans, oil filters, 
glue pots, barrels, microscopes, pyrometers, calori- 
meters, storage batteries, air hose 10 

Pickling tanks, etc 20 

Testing apparatus 10 

Testing instruments (electric) 10 

Fixed kettles and scales 10 



DEPRECIATION AND MAINTENANCE 



151 



Office and shop furniture and fixtures — including store and 
tool room fixtures: 

Factory equipment 10 % 

Furniture and fixtures 10 

Partitions 7V2 

Watchman's system 71/2 

Benches, partitions — permanent jyi 

Benches 8 

Trucks and movable racks 7^2 

Miscellaneous equipment — including desks, chairs, type- 
writers, adding and calculating machines, blue-print- 
ing machines, filing cabinets and trucks, shelving par- 
titions, time clocks, time detector systems, telephone, 

fiexotypes, graphotypes, etc 10 

Typewriters and adding machines 20 

Telephone equipment 7V2 

Transportation — local : 

Locomotives — steam and electric 6 2/3 

Motor trucks, automobiles, stable equipment, motor 

boats, etc 25 

Horses and wagons 12 

Laboratory and scientific apparatus 10 

Restaurant equipment 10 

Surgical instruments 10 

Yard equipment — industrial or shop 7V2 

Floating equipment lO 

Patterns — standard : 

Aletal, net additions 75 

Wood, net additions 100 



Basis of Standard Rates 

The foregoing schedules are intended as a guide in de- 
termining rates of depreciation. All the rates are based on : 
(i) the cost of equipment, (2) the life of the equipment, and 
(3) on a ten-hour day ; taking into consideration that there will 
be a residual value after the life. If it is desired to obtain 
a rate of depreciation covering the whole plant, the rate of 6% 
may be considered equitable ; or the plant may be split up into 
two sections, viz., (i) buildings and (2) plant, consisting of 
machinery and equipment. In such a case the rates recom- 
mended would be 3% on all buildings, and 7% on machinery 
and equipment. 



IS2 



DETAILED FACTORY REPORTS 



Group Rates 

If it is desired to adopt rates covering certain groups of 
plant and equipment, the following schedule is suggested, each 
group rate to be applied to the investments in that group: 



Group Depreciation Rates 

Buildings: 

Reinforced concrete or steel tile 

Brick and steel — non-combustible roof and concrete floors 

Brick, steel, and wood 

Brick and wood 

Steel frame — wooden roof and corrugated iron walls.... 
Steel frame — non-combustible roof and corrugated iron 

walls 

All-wood structures — well built (20 years) 

All-wood structures — cheap (20 years) 

Miscellaneous structures 

Miscellaneous real estate improvements 



Rates 



• 3% 



Special 



Mechanical Equipment of Buildings: 

Sprinkler system 

Heating and ventilating system 

Water and sewer piping, and sanitary fixtures. 

Electric light and power wiring 

Elevators 

Fire alarm and fire prevention apparatus 

Refrigeration system 



.62/3% 



Plant Power and Large Equipments: 

Boilers, pumps, and feed-water heaters, air compressors.. 

Power piping (steam, water, air, gas, and oil) 

Switchboards, main wiring, and conduits 

Turbines, engines, generators, dynamos, transformers.... 
Cupolas, converters, melting furnaces, and accessories.... 
Annealing and heating furnaces, ovens, forges, etc 



6% 



Machinery — Exclusive of Hammers: 

Machinery, motors, machine tools, traveling cranes, etc. 

Punch presses, bending rolls, power shears 

Wood-working machinery 

Miscellaneous machinery 

Shafting, pulleys, hangers, and belting 

Drop and helve hammers 



Small Asset Tools: 
Machine-tool accessories — boring bars, driver's keyseating 

broaches, etc. (all renewals to repairs) 

For machines 

Hand tools 



6% 
10% 

10% 



DEPRECIATION AND MAIXTEXAN'CE 153 

Special 



Punches and dies 

Chills, proving ground equipment 

Gages 

Chucks 

Jigs and fixtures 



Rates for Special Machinery 

In arranging the foregoing schedule, many items of spe- 
cial machinery are left out of the classification for two reasons : 
First, before placing a rate on special machinery, the nature 
of its operation has to be carefully considered; it might, for 
instance, be used only on certain work. Secondly, obso- 
lescence may be a large factor in determining the rate of a par- 
ticular machine. In some cases it may be necessary to amortize 
special machinery when it is of little more than scrap value 
after a particular piece of work is finished. 

Method of Charging off Depreciation 

Attention must here be directed to the importance of 
charging off depreciation on conservative and correct lines. 
Some manufacturers make a practice of charging of¥ the entire 
plant as rapidly as possible, while others, in a few years, write 
off their books from 50% to 75% of the value of their plant 
assets. Again, in some instances, the amount of depreciation 
written off depends upon the amount of profit earned for the 
current year. When a large profit is made, a fair depreciation 
is written off; whereas, if the profit is small, none whatever is 
considered. 

When the amount of depreciation has been credited to a 
reserve account and not written off the cost of the plant assets, 
the only change necessary will be to adjust the amounts of 
depreciation from the time of the purchase of the property 
according to the new rates to be used, and then use the proper 
rates for the ensuing periods. On the other hand, if deprecia- 
tion has already been written off the asset accounts, adjust- 



154 



DETAILED FACTORY REPORTS 



ments should be made to restore these accounts to their orig- 
inal cost value, and a depreciation reserve account created. 

Difference Between Amortization and Depreciation 

There is a clear distinction between depreciation and 
amortization. Depreciation represents the wasting of an asset 
due to wear and tear and other factors, as mentioned in the 
beginning of this chapter. Amortization implies that the value 
of an asset disappears in a given period of time, not through 
wear and tear, but through obsolescence. Obsolescence may 
be brought about in various ways. The asset — whether ma- 
chinery, equipment, or buildings — may become obsolete 
through the progress of invention ; or the value of the asset 
may disappear through the ownership being vested in other 
hands after a certain period of time ; or the work for which 
a special type of building or a particular kind of machinery 
is used may cease entirely. Then, if there is no market for 
such machinery or buildings, the assets in question will only 
be worth their scrap value. 

Legal Definition of Depreciation and Amortization 

A decision of the Treasury Department in the Munitions 
Tax Law of September 8, 191 6, Regulation No. 39, issued 
October 24, 1916, as Treasury Decision 2384 on Internal Reve- 
nue, clearly interprets the difference between depreciation and 
amortization. As the decision is frequently quoted, and as it 
is the only published legal decision at present on the distinc- 
tion between the two, it is herewith reproduced : 

Art. XX. The deduction authorized on account of 
depreciation relates to the loss due to use, wear and tear of 
physical property, owned and used by a manufacturer, but 
which is not specially designed or installed for the purpose 
of manufacturing munitions or parts thereof, and which, 
without material alteration and change, may be used in con- 
nection with any other business in which the person is or 
may he hereafter engaged. 



DEPRECIATION AND MAINTENANCE 

The annual deduction on this account will be a reason- 
able allowance determined upon the basis of the cost and 
probable number of years constituting the life of the prop- 
erty. 

If the same building and machinery or other equipment 
are used coincidently for purposes other than the manufac- 
ture of munitions or parts thereof, then the amount de- 
ductible from the gross income returned for the purpose of 
this Title on account of depreciation will be apportioned 
in accordance with the rule hereinbefore set out for appor- 
tioning running expenses, and the deduction from the gross 
income contemplated by this Title will be made accord- 
ingly. 

Art. XXI. Section 302 of this Title authorizes a de- 
duction to meet the conditions peculiar to each concern, 
and has for its purpose the amortization of the values of 
buildings and machinery constituting special plants, which 
will, except for salvage, have no substantial value to the 
manufacturer when the contracts executed or to be executed 
for the manufacturer of munitions or parts thereof, have 
been fully performed. 

The deduction authorized on this account relates to 
property (buildings, machinery and equipment) especially 
constructed or installed for use in the manufacture of muni- 
tions or parts thereof, and which, when no longer useful for 
this purpose, cannot, without material alteration or change. 
if at all, be used for any other purpose, the life of which 
property is substantially coincident with the life of the 
contracts. 

The annual allowance to be deducted on this account 
will be determined by estimating the probable number of 
years the property will be used in the manufacture of muni- 
tions or parts, and by dividing the cost of such property, 
less estimated salvage, by such probable number of years. 
The quotient thus obtained will measure the amount to be 
deducted each year on account of amortization, until the 
cost of the property has been extinguished. Or the cost of 
the property may be amortized on the basis of the quantity 
of munitions or parts thereof manufactured under contracts 
in connection with the fulfilment of which the buildings and 
machinery or equipment were specially constructed or in- 
stalled. 

Neither the depreciation nor the amortization deduc- 
tion allowable in the return made for the purpose of this 
Title will relate to property used in connection with any 
other business carried on by the manufacturer. Amortiza- 
tion applies only and particularly to those special plants 
and equipment v;hose life and value, except salvage, will 
terminate with the end of the business for which they were 



^J5 



156 DETAILED FACTORY REPORTS 

erected and equipped. It is to be differentiated from 
depreciation in that depreciation relates to property whose 
Hfe and value is not dependent upon or materially affected 
by its use in the manufacture of munitions or parts thereof. 

The Effect of Overtime on Depreciation 

The following is a copy of a letter sent to the author by 
the auditor of one of America's largest steel companies on 
the question of abnormal depreciation caused by working over- 
time. The letter in question covers the problems raised by 
working overtime under war conditions and on war contracts, 
but as the writer clearly states the proposition as a whole, and 
the points raised therein are important, the letter is here re- 
produced in full : 

I. In arriving at rates for overtime depreciation, due 
consideration should be given to the following conditions, 
the effect of which should be properly reflected in any rates 
established : 

(a) Any time over the normal should be subject to 

overtime deprecation. 

(b) Present conditions demand that production be 

considered paramount. The machine receives 
secondary consideration. In fact it is forgotten 
and is usually "driven to death." 

(c) The constant usage of a machine affords no oppor- 

tunity for proper repairs and supervision of its 
condition and maintenance, all of which obvi- 
ously shortens its life. 

(d) When there is more than one shift the responsi- 

bility for the up-keep is divided, as each man, 
especially if on piece-work, will always leave 
it to the following man to "'fix things up," with 
the result that the machine is bound to suffer. 

(e) Extra shifts necessitate having at least two, in 

many cases three men, working on the same ma- 
chine in the course of 24 hours. Inasmuch as 
no two men will run a machine in the same man- 
ner the effect must be detrimental. 

(f) Working over eight hours will necessitate night 

work. The reduced efficiency of a man on night 
work has been recognized and is bound to be 
reflected in the usage of the machine. 

(g) Additional shifts require a larger supply of men, 

and accordingly dilute skilled labor so that it 



DEPRECIATION AND MAINTENANCE 



157 



becomes necessary to take on green men — 
which fact does not presage any good for the 
machine. 
(h) When driving a machine incessantly it has no 
chance to rest. It is scientifically conceded that 
metal is subject to fatigue and its life is length- 
ened by an occasional rest. 

2, We feel that the rates established for normal depre- 
ciation should be on the basis of an eight-hour day. Any 
department working in excess of eight hours should be sub- 
ject to overtime depreciation. Inasmuch as all plants en- 
gaged on Government work consider that a straight day's 
work or shift is eight hours, we think it would be a mis- 
take as well as cause considerable confusion to make any 
further distinction. 

3. (a) The following is a table of rates which we think 
would fairly reflect the proper allowances for abnormal 
depreciation : 

8 hours — normal depreciation 

— 5^0 of normal depreciation, additional 



9 ■ 


• - 5% 


10 


' — 10% 


II ' 


' — 15% 


12 ' 


' — 20% 


13 ' 


' — 25% 


14 ' 


' — 30% 


15 ' 


' — 4o7o 


16 ' 


' — 50% 


17 ' 


' — 60% 


18 ' 


' — 7o7o 


19 ' 


' — 80% 


^0 ' 


' — 90% 


21 


' —100% 


22 ' 


' —115% 


23 ' 


' —130% 


24 ' 


' —150% 



(b) We feel that in fairness to all, after a normal rate 
of depreciation has been established, the allowance for over- 
time depreciation should exclude the element of obsolescence. 
This would mean that the allowance for overtime deprecia- 
tion lip to a certain point would not increase in the same 
ratio as the number of hours. In other words, we consider 
that the factor of obsolescence would be constant, and the 
only varying element would be the actual depreciation due 
to wear and tear. The "certain point" referred to above 
should be sixteen hours. After this point, we consider 
jiepreciation takes place very rapidly and we feel that in the 
above table the conditions are truly presented. 

4. We think, furthermore, that it would be an injustice 



158 DETAILED FACTORY REPORTS 

not to consider that the auxiHary departments of a plant 
should be subject to overtime depreciation. By this is meant 
such departments as steam, power, water, transportation, etc. 
Obviously a "speed-up" program is felt in every department 
in the plant. It is conceded that these departments do 
ordinarily work 24 hours a day, but it is only in a measure. 
Under normal conditions they are working at full capacity 
only a fractional part of a day, and it was on this basis that 
normal depreciation was figured. If, however, it is required 
that these plants be run at full capacity for a greater than 
their normal time, it cannot be denied that there is addi- 
tional depreciation. 

5. We feel that the application of overtime deprecia- 
tion will necessitate the determination of normal deprecia- 
tion for each department in the plant. Furthermore, the 
determination of the number of hours a department is work- 
ing overtime, unless treated in a broad way, might resolve 
itself into a complicated problem. Not knowing the attitude 
that will be taken in this respect, we hesitate in offering any 
suggestions. 

6. We trust that if not considered out of order, you will 
forward this statement of our views to the War Appraisals 
Board. This question is of much importance to us and we 
are accordingly deeply interested. We would be glad to 
furnish the Board with any information that it might require 
and would be very glad to work with it further, giving it any 
possible benefit resulting from our detail study and experi- 
ence. 



Limit of Maximum Percentage for Overtime 

There is one exception that the author would Hke to make 
in connection with the schedule presented on page 157. Be- 
fore outlining this exception, a quotation bearing on the same 
subject is taken from a memorandum of Captain J. P. Carlin, 
Washington, D. C, who has made a very exhaustive study of 
the subject of depreciation and the effect of overtime. The 
memorandum in part reads as follows : 

1. It is assumed that every manufacturer will have a 

machine reserve supply to prevent unnecessary 
destruction of plant. 

2. If a reserve supply is maintained, proper relaxation 

will be given the machinery and opportunity 
afforded for proper repairs and maintenance. 



DEPRECIATION AND MAINTENANCE 159 

3. Proper supervision will result in the machinery re- 

pair and maintenance group, maintaining each 
unit of the plant in proper shape, irrespective of 
shifts. 

4. Normal rates of depreciation are considered on the 

basis of normal labor conditions and the average 
workman is this basis. 

5. Night work results in decreased efficiency, but 

should show no appreciable reflection in the usage 
of the machines, especially where maintenance is 
kept up by day repair crews. 

6. Where skilled labor is diluted with unskilled labor, 

it is considered that depreciation resulting from 
wear and tear will be increased; but this will be 
absorbed in maintenance charges, which are 
allowed as an element of cost in cost-plus con- 
tracts in addition to depreciation. 

The only variable in overtime use or diluted labor is 
wear and tear. Natural decay and obsolescence, however, 
were also considered in determining the normal rates of 
depreciation. Both deterioration and obsolescence are con- 
stant and proper maintenance should absorb a part of the 
wear and tear. 

Theoretically, however, it is evident that if age de- 
terioration and obsolescence, two of the three elements of 
depreciation, are constant, and if the third physical deteri- 
oration due to wear and tear is partially made good by main- 
tenance . . . the total allowance for overtime or other 
causes should not exceed 100% additional of the normal rate. 

The author has also come to the conckision, after careful 
consideration, that the rate at no time should exceed an addi- 
tional 100% of the normal rate, ^^'ith normal rates calcu- 
lated on a ten-hour basis, it is recommended that the additional 
percentages as outlined in schedule of depreciation rates to 
cover the additional hours, should be as follows : 

II hrs. — add 5% of the normal rate 



12 


" — ' 


ID 


13 


" — ' 


15 ' 


14 


— 


20 ' 


15 


" — ' 


25 ' 


16 


" — ' 


30 ' 


17 


" — ' 


35 ' 


18 


" — ' 


40 



l6o DETAILED FACTORY REPORTS 

19 hrs. — add 45% of the normal rate 



20 " - 


_ ., ^Q .. .. 


21 " - 


- " hlV^ ' 


22 " - 


- " 671/2 " " 


23 " - 


- " 80 " " 


24 " - 


_ .. ^^ « .< 



In discussing the additional percentages for overtime, the 
fact must also be taken into consideration that proper main- 
tenance and repairs are essential for machine operation ; other- 
wise machinery would break down and production would be 
interfered with. No manufacturer would consider for a mo- 
ment running his machinery continuously without repairing 
or adjusting it. In other words, if no time is provided for 
repairs and maintenance, the machine has to be laid aside and 
another substituted. Depreciation would then cease at that 
point, excepting for the small rate of an idle machine. Another 
fact which should be considered is that repairs and mainten- 
ance are chargeable as costs, and, if not made during the 
current period, must be made later. This cost would offset 
any higher percentages to add to the normal depreciation rate. 

Abnormal Depreciation and Amortization 

Wherever plant and facilities have been acquired specifi- 
cally for certain contracts and depreciate in value owing to 
the market conditions, an allowance should be made for the 
difference between the actual cost and the market value, pro- 
viding the market value is much lower than the cost. This 
difference or loss in invested capital should be borne by the 
contracts. 

Another problem sometimes arises which must be taken 
care of by amortization. This occurs where the contractor 
has purchased special machinery and equipment to be used 
exclusively on certain contracts, and where the value of this 
machinery and equipment may be worth little more than scrap 
value at the end of the contract owing to the fact that they 



DEPRECIATION AND MAINTENANCE i6i 

cannot be used for any other purpose. Wherever a condition 
of this kind exists, the following information should be ob- 
tained and used as a basis for determining the method of 
amortization : 

1. Cost of the equipment. 

2. Can the equipment be used for any other purpose 

than for the contract for which it was purchased ; 
if so, for what class of product can such equip- 
ment be used, stating particularly whether or not 
the product is one which is being manufactured 
in the particular plant or elsewhere. 

3. In the estimated value of the equipment at the end 

of the contracts in question, the basis of the valua- 
tion of the machinery or equipment should be 
stated in connection with that outlined under (2). 

4. If the machinery or equipment is of such character 

that it cannot be used in connection with any other 
work, the value should be appraised accordingly. 

5. The scrap value of the machinery and equipment in- 

dependent of all differences should also be stated. 

Before final action is taken to amortize machinery and 
equipment as in the outline above, it would be advisable to 
have a qualified engineer report on the matter in question. 

Maintenance, Repairs, and Renewals 

The cost of maintenance, including repairs and renewals, 
is often charged against the reserve for depreciation, for the 
reason that depreciation rates are established after taking into 
consideration the estimated cost of maintenance during a given 
period of time. Wherever the cost of maintenance is charged 
as a separate item of overhead, provision should be made for 
its distribution over departments. If the cost of each indi- 
vidual repair and renewal order is compiled separately, the 



i62 DETAILED FACTORY REPORTS 

charge may be applied directly to the department in which the 
repair is made. In large manufacturing plants this may be 
readily done. 

The cost of maintenance comprises two classes of repairs 
and renewals : 

1. Repairs which are a daily occurrence and practically 

in the nature of up-keep. Such items refer to the 
repair of belts, doors, and miscellaneous equip- 
ment, and small tools. 

2. Repairs or renewals which are more or less extraor- 

dinary in character, such as those where the 
volume of work is so large as to make it more 
equitable to distribute the total cost over a longer 
period of time than one month. 



CHAPTER XI 

DISTRIBUTION OF FACTORY OVERHEAD 

Direct and Indirect Distribution of Overhead 

We have seen that the elements of prime cost, which in- 
clude material and labor, are applied directly to the product. 
Any factory expenses which can be treated as a direct expense 
charge are applied in the same way, and when this is done 
they are taken out of the class of factory overhead. If 
it were possible to assign all items composing the factory over- 
head expenses directly to the product manufactured, true costs 
would be obtained very easily; but this can seldom be done. 
It is best, however, to assign as many of the indirect charges 
as possible directly to the product to which they relate, thus 
tending to reduce to a minimum the total amount of factory 
overhead to be applied indirectly. 

The factory overhead that cannot be absorbed in the 
article cost directly is applied indirectly in the following man- 
ner: 

1. The elements of factory overhead cost are assigned 

equitably to specific departments of the factory, 
including productive, non-productive, and miscel- 
laneous departments. 

2. The total cost of the indirect departments is then 

transferred to, and distributed over, the productive 
departments on some fair basis. 

3. The total amount of factory overhead expenses 

chargeable to each productive department is de- 
termined, and is then distributed over the various 
jobs, orders, articles, or processes. 
163 



l64 DETAILED FACTORY REPORTS 

Each item of overhead is not necessarily apphcable to 
all departments of the plant ; or where it is, it will not be 
applicable to each in the same proportion. Some of the items 
relate particularly to one department, whereas others relate 
to two or more. 

The only equitable way of ascertaining true costs in a 
large factory, is by computing separate departmental rates for 
the overhead affecting the commodities which pass through 
each department. In smaller plants, and under some condi- 
tions, the product manufactured may be of such a character 
that one overhead rate is applicable to the entire production 
of the plant. Examples of this kind are rare, however, and 
in adopting a plan for distributing factory overhead expenses, 
care should be exercised to ascertain the departmental over- 
head in the correct way at the start. 

General Operating Expenses 

In large manufacturing plants it is impossible to charge all 
items of factory overhead to definite departments. After all 
expenses which can be so applied are charged to the depart- 
ments in which they originate or to w'hich they obviously be- 
long, there are some which relate to the plant as a whole. 
These items are often summarized under the caption "General 
Operating Expenses." After their total is ascertained, it is 
distributed over all the departments of the plant on some 
arbitrary basis. In this way the general operating expenses 
are included in the departmental overhead rates which are as- 
certained after the total overhead of each of the non-productive 
departments has been distributed to the productive depart- 
ments. 

Under some conditions it is practicable to treat the gen- 
eral operating expenses as a separate item of cost, in which 
case a separate rate is provided for absorbing this fourth 
element of factory cost in the cost of the articles manufac- 



DISTRIBUTION OF FACTORY OVERHEAD 165 

tured. In other cases the general operating expenses are ab- 
sorbed in the article cost by the addition of a certain percentage 
to the departmental overhead rates. Whether they should be 
applied to the product as a separate item of cost, or as part 
of the overhead of departments, must be determined by the 
circumstances of the case. 

Methods of Distributing Overhead 

Assuming the departmental method of distributing over- 
head has been adopted, there still remains the most complex 
problem of all — upon what basis shall the overhead be distrib- 
uted within the departments so that each job, order, or article 
may be charged with the portion that properly belongs to it? 
To illustrate, it may be assumed that high-priced and low- 
priced men work side by side, or that there are machines of 
different size and value operated by men who draw the same 
wages, or that the operations involve about equal parts of 
machine work and work by hand — all of which are quite ordi- 
nary conditions. Shall the basis for the distribution of the 
departmental overhead be the cost of the labor expended upon 
the work, or the time given to it in the department ? Does the 
cost of material enter in as a factor? Is a machine rate possi- 
ble or practical? These are some of the questions which must 
be answered, and answered correctly, if the cost results are 
to be accurate. Thus, no one method of distributing indirect 
expense can be applicable to all cases; everything depends on 
the particular conditions. 

It is not the intention here to attempt to describe in 
detail every method that may be employed, but only those 
which are commonly used at the present time and which, as 
more or less standard methods, may be satisfactorily applied 
under definite conditions of manufacture. These are: 

1. Prime-cost method 

2. Productive-labor-cost method 



I66 DETAILED FACTORY REPORTS 

3. Productive-labor-hours method 

4. Machine-rate methods 

5. Miscellaneous methods 

The above methods of distribution may be further classi- 
fied under the three broad divisions described below : 

1. Material and labor methods, in which the combined 

material and labor costs furnish the basis for the 
distribution of expense. 

2. Labor methods, in which the labor cost or the labor 

hour furnishes the basis for the distribution of 
expense. 

3. Machine methods in which the operating time of the 

various machines furnishes the basis for distribut- 
ing the items of expense. 

I. Prime-Cost Method 

Under simple conditions the method most generally used 
by small manufacturing concerns for charging departmental 
overhead to the product is the prime-cost method. Of all 
methods it is the most simple, and its presence is discernible 
even under conditions where no cost systems are in operation. 
In most businesses, for example, where a complete cost sys- 
tem is not operated, an attempt is made to ascertain costs 
when fixing selling prices by carefully calculating the material 
and labor costs ; but as regards the overhead, complete records 
are not available to determine what percentage should be 
added to the material and labor costs to cover all items of 
expense. All too frequently in this percentage, selling and 
administrative expenses are combined with factory overhead 
items. This rough and ready method of lumping all expense 
items together is inaccurate for the reason that if inventory 
values are based upon costs which include selling and admin- 
istrative expenses, these values will be inflated. 



DISTRIBUTION OF FACTORY OVERHEAD 167 

Calculation of Prime-Cost Rate 

To obtain the proper percentage to be used in applying 
the prime-cost method, it is necessary to divide the total over- 
head expenses by the total material and labor costs, the result 
being a decimal figure which is the rate to be used. Reduced 
to a formula, the procedure is as follows : 

Percentage to be added to the 

Overhead costs ^^ total material and labor 

Material cost -f- labor cost costs to cover the overhead 

expenses. 

For example, if during a definite period the amount ex- 
pended for all direct material is $20,000, and for direct labor 
is $30,000, and overhead expenses for the same period are 
$25,000, the percentage to be used in distributing overhead 
costs over the product or article would be ascertained as fol- 
lows: 

Overhead cost $25.000 507© to be added to the prime 

Material cost $20,000 -f- cost to cover the overhead 

labor cost $30,000 on the article. 

Thus, if the material cost of an article is $10, its direct 
labor cost is $5, and the overhead rate is found to be 50% 
of the prime cost, the total production cost would then be 
stated as follows : 

Material cost $10.00 

Labor cost 5.00 

Overhead cost (50% of $15) 7.50 

Total cost $22.50 

The correct application of the prime-cost method depends 
upon the accuracy of the percentage rate estaWished. This 
rate is usually based upon past experience as ascertained from 
the financial statements covering prior periods. Often, how- 
ever, the percentage is fixed by business custom and largely 
depends upon what manufacturers in the same line of business 
are using as a basis for arriving at their selling prices. 



l68 DETAILED FACTORY REPORTS 

Advantages and Disadvantage 

The chief arguments in favor of the prime-cost method 
of distributing overhead are the simpHcity of the plan and the 
few records required. Its disadvantage is that as indirect ex- 
penses are not appHed to each class of merchandise manufac- 
tured in the same proportion for each departmental process 
or for different methods of manufacture, the use of this method 
often results in inaccurate article costs. The fault is very 
marked when certain articles pass through only a few depart- 
mental processes, while others undergo all or nearly all proc- 
esses of manufacture. Under these conditions, some articles 
may be burdened with a share of the overhead expenses of one 
or more departments through which they do not pass. 

Attempts have been made to overcome the foregoing de- 
fect of the prime-cost method of distributing overhead by 
establishing a percentage rate for each department; but this 
leads to difTficulties, for the reason that material does not form 
part of the cost in every department through which the article 
passes. The costs in those departments where no material is 
used consist only of labor and overhead, and therefore no 
prime-cost method could be established. 

Manufacturers may be led into fatal errors by placing 
too great reliance upon costs which are inaccurately obtained. 
Percentage plans of this character do not provide for a com- 
prehensive analysis of costs, and too often the true value of 
a more accurate method of expense distribution is relinquished 
for the sake of simplicity. It should be noted that every de- 
partment of a plant usually has its own special equipment and 
may dififer from other departments greatly in its capital in- 
vestment, the labor it employs, the floor space occupied, the 
power consumed, and in numerous other details. Therefore, 
any method of overhead distribution which fails to recognize 
and analyze these inequalities, fails to utilize the natural cen- 
ters and the most cfificient basis for overhead distribution. 



DISTRIBUTION OF FACTORY OVERHEAD 169 

Conditions under which Inapplicable 

Under the prime-cost method of expense distribution, 
the cost of material is recognized as one of the factors that 
give rise to indirect expenses. If the method is used out of 
its special field, where the necessary uniform conditions do 
not exist and where the material cost varies considerably from 
the labor cost, the results are quite unreliable. 

An illustration will bring out forcibly the reason for the 
inaccuracy. Assume that in a jewelry establishment two 
gold rings are made in practically the same manner, without 
stones in the settings, and that the cost of material (gold) 
amounts to $5 for each ring. In one ring a diamond costing 
$50 is then mounted, which makes the material cost of that 
ring $55. In the other ring a diamond is set worth $200, mak- 
ing the material cost $205. As the labor cost is the same in 
both cases, to the more expensive ring would be added about 
four times as much overhead as to the cheaper ring; yet 
logically no more overhead should be added to one ring than 
to the other. If any additional element of overhead were 
added to the more expensive ring, it should be only for such 
items as insurance, interest, and other special charges in- 
curred in handling the more costly setting. The more accu - 
rate method in this case would be to base the overhead cost 
of the rings upon the cost of the labor, or hours of labor, 
spent in producing them — methods of distribution to be ex- 
plained in following sections. 

2. Productive-Labor-Cost Method 

The productive-labor-cost method is based upon the prin- 
ciple that indirect expenses are incurred in proportion to the 
cost of the labor involved. To operate the plan, the total 
amount of overhead expenses for a definite period is divided 
by the total cost of the direct labor for the same period. This 
shows the proportion of the overhead expenses to the total 



I TO DETAILED FACTORY REPORTS 

productive labor in terms of percentage. The amount of over- 
head to be assigned to any article is then found by multiplying 
the direct labor cost by the percentage, the result being the 
amount of the indirect expenses to be added to the prime cost 
in order to give the total factory cost. The same principle 
applies to the cost of any job, order, article, or process. This 
method may be concretely presented by means of the following 
formula : 

™ ^ , , , , , Percentage of productive la- 

Total factory overhead _ ^or cost to be charged to 

Total productive labor cost J<^t>, order, article or proc- 

ess. 

To illustrate, assume that ui(„ i. ay-roils for a certain pe- 
riod show payments of $16,000 for direct labor, and that i..e 
factory overhead expenses for the same period are $14,000, 
or 8jy2% of the direct labor cost. If a man works on an 
article five hours at 32 cents an hour, and the cost of the direct 
material is 60 cents, the total production cost of the article 
may be stated as follows: 

Direct material cost $ .60 

Direct labor cost 1.60 

Factory overhead cost (87^2% of $1.60) 1.40 

Total cost $3.60 

Applicability of Labor-Cost Method 

The simplicity of the labor-cost method is a great point in 
its favor, but at the same time offers a temptation to employ it 
too widely. The point to consider is how far the particular 
conditions are in accord with the principle of the method. 
To fit the case perfectly, the labor should be the dominant 
element in the manufacturing process, and there should be a 
marked uniformity as to product, wages paid, and time of 
operation on the articles manufactured. These conditions 
rarely exist throughout an entire factory, but are not uncom- 
mon in a single department. If applied to a department under 



DISTRIBUTION OF FACTORY OVERHEAD 171 

the conditions stated, the method will prove to be quite accu- 
rate. 

When the productive-labor-cost method is used in depart- 
ments equipped with machines, special care must be exercised 
to see that these departments are uniform as to cost and oper- 
ating expenses; or, if not, that there is a corresponding dif- 
ference between the wages paid to the operators. The method 
is less accurate, and even misleading, if these uniformities do 
not exist. For instance, if a low-priced man is operating an 
expensive automatic machine, and a high-priced man is work- 
ing at a cheap machine where skill amounts to more than the 
cost of operating the machine, the charges for indirect ex- 
pense will not only be inaccurate but will be actually reversed. 

The productive-labor-cost method is often used to pro- 
rate unassigned items of factory overhead to the operating 
departments of the plant when the data upon which to base a 
more intelligent distribution cannot be readily obtained. Any 
errors which might result from the distribution of the un- 
assigned expenses in this way would be very slight in most 
instances, as they would be absorbed in the cost of the entire 
production of all departments. However, only an examina- 
tion of the peculiar circumstances of each case can determine 
where theoretical accuracy may be safely sacrificed for sim- 
plicity and practical results. 

3. Productive-Labor-Hours Method 

The principle of the productive-labor-hours method dif- 
fers from that just described only in that the amount of labor 
is measured by time and not by cost. That is to say, the over- 
head expenses of a plant are considered to be in proportion to 
the number of employees engaged and the hours they work, 
rather than to the wages paid. To operate the plan, the total 
amount of factory overhead expense for some definite period 
is divided by the total number of productive hours of work 



172 DETAILED FACTORY REPORTS 

during the same period, the result being the rate per hour to 
be added as overhead cost to the prime cost of the product. 
Reduced to a formula, the principle may be stated as follows : 

Total amount of factory 

overhead expense Rate per hour to be applied 

to the number of hours of 



Total number of productive work upon the product, 

labor hours 

Using this formula, and assuming the number of work- 
ing hours of direct labor to be 56,000 and the factory expense 
$14,000, the result would be: 

a. r 25 cents per hour to be 

$14,000 factory expense charged to job, order, or 

56 000 hours process for each productive 

hour of work spent upon it. 

The total cost of the single article discussed under the 
preceding method would then be : 

Direct material cost $ .60 

Direct labor cost (5 hours at ^2 cents per hour).. 1.60 
Factory overhead cost (5 hours at 25 cents per hour) 1.25 



Total cost $3-45 

An analysis of the difference between the two costs will 
provide the best basis of comparison between the methods. 
The critical point is the 32 cents per hour of the labor cost. 
In the first example the average wage per hour, found by 
dividing $16,000 by 56,000, is only 28 4/7 cents. Therefore, 
the output of any man whose pay is more than 28 4/7 cents 
per hour has to bear more of the indirect expense in the first 
method than in the second. 

This makes it clear why there should be a marked uni- 
formity as to product, wages, and time of operation in the 
direct-labor-cost method. Differences in any of these factors 
tend to indicate marked discrepancies in costs unless it can 
be shown that there are corresponding differences in the di- 



DISTRIBUTION OF FACTORY OVERHEAD 173 

rect elements of cost. This has to be shown in each particular 
case ; for there is no essential reason why, as between two men 
working side by side, the output of the higher-priced man 
should incur more overhead costs than the other. On con- 
sideration it will be evident that, on the whole, factory over- 
head expense is more a function of time than of labor cost. 
If the items that make up the factory overhead are examined 
one by one, as indirect labor items, rent, insurance, taxes, 
interest, depreciation, maintenance, repairs, renewals, light, 
heat, power, etc., it will be seen at once that the majority, 
though not all of them, accumulate according to time and have 
but a very slight connection with the rate of wages. 

The conclusion is clear that, other conditions being equal, 
the productive-labor-hours method is applicable to a wider 
field than the productive-labor-cost method. Certain limita- 
tions remain, viz., the labor should be a dominant factor, and 
for the most part the product should be uniform. Where 
machines are used, the same precautions must be taken as in 
the case of the previous method except that the wages of the 
operators may be disregarded. 

4. (a) Machine-Rate Methods 

All machine-rate methods are based upon the principle 
that overhead expense accrues in proportion to the number 
of hours of machine operation. The modern application of 
the machine-rate principle covers two important points which 
are as follows: 

1. It recognizes and provides for differences in over- 

head expense that arise from the operation of 
different kinds of machines. 

2. It is specifically devised to absorb, as direct charges, 

all overhead expense that can be associated directly 
or indirectly with the operation of any machine 
or particular area of the plant. 



174 DETAILED FACTORY REPORTS 

In installing the machine-rate method, the department is 
taken as the unit whenever possible; but if a department in- 
cludes different machines or processes, a further subdivision 
of the departmental charges must be made. The essential 
point is to reduce the unit to processes of the same kind, or to 
the machines used in such processes, even if this carries it 
down to the single machine. 

The object in view is to collect the direct labor cost and 
overhead expense against each machine or process in such a 
way as to ascertain what it actually costs to operate the ma- 
chine per hour, i.e., what the hourly machine rate is when the 
operations or processes have been classified and the charges 
have been made, each item being considered by itself. In ob- 
taining the charge per hour, which includes the direct labor 
cost as w^ell as the overhead cost, only the actual number of 
operating hours for the cost period is taken into considera- 
tion. 

There are various forms of machine-rate methods, termed 
"old-machine-rate," "new^-machine-rate," "fixed-machine-rate," 
"scientific-machine-rate," and "supplemen<-ary-machine-rate." 
They can all be specifically commended where machines are 
largely used, for the reason that all items of overhead expense 
are gathered at the "point of the tool," so to speak, where they 
are easily applied to the product. The method in all cases is 
to utilize a machine or group of like machines — termed pro- 
duction centers — for distributing overhead expenses. 

\Mierever the machinery is of more importance than the 
human element and the workman is merely a tender or the 
tool of the machine, the machine-rate plan will be the most 
equitable method of distributing overhead expense. On the 
other hand, if the skill of the workman is required to make 
the product, and the machine is of secondary importance, i.e., 
a tool used in the production, either the productive-labor-cost 
method or productive-hour method is more accurate. 



DISTRIBUTION OF FACTORY OVERHEAD 175 

Method of Compiling Machine Rate 

In ascertaining the machine rate, the direct labor cost is 
obtained from labor reports, as is also the number of operating 
hours. The material cost may also be combined with the direct 
labor and overhead cost before the machine rate is fixed, if 
the materials operated on are the same in grade or price. If 
price or grade varies, the material cost should not be so in- 
cluded. Expenses which are more or less fixed in character, 
such as rent, insurance, taxes, interest, and depreciation, accu- 
mulate and are chargeable to a machine whether it is operated 
or not. These charges are usually applied upon the basis of 
floor space or valuation of the equipment. 

Depreciation is charged to each machine at a rate per 
hour ascertained by dividing the total cost of the machine, less 
its scrap value, by the estimated number of working hours of 
its life. In some cases, where machines stand idle for a con- 
siderable length of time, charges applicable to them are dis- 
tributed over an entire operating department instead of ap- 
portioning them among the idle machines. In this way these 
expenses are distributed and absorbed in the cost of all product 
which goes through the operating department. 

The power cost chargeable to a particular machine should 
be based on consumption. An allowance for horse-power lost 
in transmission may be made if great exactness is required. 
If no such allowance is called for, the first step in determining 
power charges is to calculate the horse-power hours of all 
machines operated. This is done by multiplying the horse- 
power of each machine by the number of hours it is operated 
and adding the individual totals. Any power generated at 
the engine but not indicated in the above total, is simply con- 
sidered as unutilized power, the cost of which is borne pro 
rata by all the machines. 

After all the charges have been made directly to the vari- 
ous machines, the balance of the indirect expenses which can- 



176 DETAILED FACTORY REPORTS 

not be directly connected with machine operation must be con- 
sidered. These are of two classes — expenses that can be iden- 
tified with certain departments, and general operating expenses 
for the plant as a whole. Each department adds to its own de- 
partmental indirect expense its share of the general operating 
expense, and proceeds to distribute the total over its own 
product in accordance with the plan of expense distribution 
which seems best to fit the needs of the case. For example, 
if the departmental costs are based on a unit of measure, as a 
ton or gallon, a score or dozen, the total indirect expense 
of the department is divided by the total units of output, giving 
the rate per unit. The rate so obtained is used to charge 
the machines or processes w'ith their proportion of overhead, 
by multiplying the number of units of product operated on 
in either case, by the rate per unit. 

If the costs are based on time, the departmental expense 
is divided by the total number of machine-operating hours. 
This rate is added to the direct rate already established, giving 
the complete or final rate per hour to be charged to the product 
of that department. After all indirect and general operating 
expenses have been applied to a machine, the formula for as- 
certaining the machine rate would be as follows: 

Total amount of productive 
labor -f- total amount of 

overhead applicable to a ,, , . , ... 

machine Machme rate to be applied to 

product for each hour of 



Total number of machine- machine operation, 

operating hours 

Assuming that an article passes through several machine proc- 
esses, its overhead cost is. arrived at by multiplying the hours 
of each process and adding together the separate totals thus 
obtained. Material costs must then be added to the process 
cost to give the final factory cost. 

The scope of the machine-rate method is covered by the 



DISTRIBUTION OF FACTORY OVERHEAD i;; 

foregoing descriptions. It can be used when all operations 
are performed by machines, but it cannot be applied to general 
bench-work and miscellaneous forms of hand labor. 

4. (b) Fixed Machine-Rate Method 

The fixed machine rate is characterized by three special 
features : 

1. The rate itself is an estimate and is made in advance. 

2. The rate is estimated on the basis that every ma- 

chine in the shop will run full time. 

3. All charges unabsorbed by the estimated fixed rate 

are distributed through a supplementary rate, the 
special feature of which is its relation to idle time. 

Without going into a detailed explanation, it may be 
well to state that this fixed method is neither an accurate nor 
a practical method of distributing overhead for several rea- 
sons : first, the rate is an estimate and not a fact; second, it 
is based on every machine in a shop running full time, which 
is rarely the case; and third, the adjustment to actual condi- 
tions is made by means of a supplementary rate, which de- 
stroys the accuracy of the overhead distribution to product. 

The only commendable feature in connection with this 
rate is the fact that it provides a record of idle machine time. 
While this is very valuable data, it could be compiled in 
a supplementary statistical record without the necessity of 
using it as a method of overhead distribution. 

4. (c) Sold-Hour Method 

A simplification of the machine-rate plan is that known 
as the "sold-hour" method. The principle on which it is based 
is that the services of a particular department (usually one in 
which the machine equipment is not very elaborate) are "sold" 
for so much an hour regardless of the type of machinery or 



178 DETAILED FACTORY REPORTS 

grade of labor employed. The hourly rate is determined b; 
combining the departmental overhead with its total wages, and 
dividing the sum thus obtained by the number of hours of 
work spent on jobs within a given period — taking the average 
figures of a normal period. As an example, if w^ages plus 
overhead average $5,000, and 5,000 productive hours cover the 
work of a cost period, the charge to jobs would be $1 for each 
hour's work spent upon them. 

The ease with which costs can be computed by this simple 
method makes its use applicable where other methods would 
prove cumbersome or superfluous in their greater detail. It is 
especially appropriate to conditions where the work partakes 
of the nature of a service rendered. For this reason the 
method is generally applied to the composing departments 
of printeries, and to departments where experimental or sim~ 
ilar work is carried on. In both these instances jobs are 
handled strictly in conformity with the wishes of the cu!-(omer, 
and an average charge for the hourly services of the depart- 
ment is a truer index of cost than would be a charge made in 
any other way. 

5. Miscellaneous Methods 

Various modifications and combinations of methods for 
the distribution of overhead have been devised to meet special 
conditions in different lines of business. For the most part 
they are "percentage" plans in some form or other. It has 
been shown that accurate costs cannot be obtained by the addi- 
tion of an arbitrary percentage to the prime cost of the prod- 
uct, except under the most elementary conditions where there 
is only one class of product and all processes are the same. 
This, however, does not forbid the application of a percentage 
to the output of a particular department for the distribution 
of departmental expenses. In fact, the productive-labor-cost 
method is a percentage plan, but is not an arbitrary percentage 



DISTRIBUTION OF FACTORY OVERHEAD 179 

plan, since it is based on one of the important factors of pro- 
duction. 

The manufacturing conditions under which an arbitrary 
percentage may be safely used for the distribution of expense 
must be judged by direct observation. Wherever employed, 
the percentage method usually fails to distribute the overhead 
as accurately as the other methods described. 

In shops where the material constitutes much the larger 
part of the prime cost and where the processes are uniform, 
overhead may be distributed upon the basis of weight, quan- 
tity, or number — as so much per ton, dozen, gross, hundred, 
and so on. 

Under conditions where the material does not differ in 
grade or price to any considerable degree, or where the work 
is little more than that of assembling finished parts bought in 
the market, the cost of the material may be substituted for 
the quantity as the unit of distribution. However, such con- 
ditions are only found in a small business, or in a special de- 
partment of a large business. 

Overhead may also be distributed over departments ac- 
cording to the number of employees in each. This method 
is advocated for distributing the cost of police protection as 
outlined in Chapter XXXII in the section on "Guarding of 
Property." 

Fixed Versus Fluctuating Rates 

After the particular method for the distribution of over- 
head has been decided upon and the rates determined, the 
question arises as to the length of time the rates shall be 
adhered to. Output in most plants fluctuates from month to 
month, and most factories experience dull seasons which are 
offset by exceptionally busy periods. Therefore, the question 
arises as to the better plan to pursue. Should a fixed rate be 
established to be used throughout an entire fiscal period or 



l8o DETAILED FACTORY REPORTS 

should the rate be changed at the end of each cost period? 

When the product is subject to seasonal demands, it is 
advisable to adhere to a fixed or predetermined rate based 
upon past experience until the cost data show that it is unre- 
liable. At no time should a fixed and arbitrary rate be used 
for a definite period if it does not insure accurate costs. 

In establishing a fixed rate for a future period, the fig- 
ures should be based on those of past experience. In some 
cases the rates are based on the average figures of three to 
five years. This practice leads to errors, as it is rarely nec- 
essary to take more than one year's transactions as a basis 
for establishing an overhead rate. The averaging of a long 
period too often covers up details which would be apparent if 
one particular year's figures only were analyzed and used. 
In small plants the figures for six, three, or even one month 
may be adequate. 

After the rates based on past experience are compiled, 
they should be carefully checked. Questions as to future 
changes in policy should then be considered. Increases in 
overhead are bound to occur in every progressive factory, and 
the rates should be brought as nearly up to date as possible 
so as to include increases which may occur in the immediate 
future. After the results for both past and future periods 
have been properly considered, a fixed rate may be established 
until such time as it proves to be inaccurate. When over- 
head rates are fixed at the beginning of the period, the rou- 
tine work of cost accounting is simplified. It is not necessary 
to wait and hold up valuable cost data until the current rate 
is compiled. 

When fluctuating rates are used, they must necessarily 
be ascertained at the end of the month or the cost period. 
This necessitates postponing the compilation of complete costs 
until all items of indirect expense are recorded and the over- 
head rate is ascertained, which is after the books have been 



DISTRIBUTION OF FACTORY OVERHEAD i8i 

closed. To avoid this delay, the rate of the previous month 
may be used, and changed only if the current month's trans- 
actions indicate that this is necessary. If the rates are based 
on the figures of the current month, valuable cost information 
may not be furnished promptly to the management because 
the cost department must wait until the end of the month 
before preparing the statistics. Therefore, whenever possible, 
fixed overhead rates with complete accounting records for 
proving their accuracy are to be preferred. 

Adjustment of Factory Overhead 

After it has been determined whether or not it is more 
practicable to use fixed or fluctuating percentages or rates, con- 
ditions may change and thus upset all previous overhead cal- 
culations. At such times adjustments are necessary. 

For instance, when an accounting is made at the end of 
a cost period it may be found that some of the overhead still 
remains to be absorbed, or that the percentages and rates 
are too high and therefore the factory overhead has been 
what is termed "over-applied" ; in either case the records 
should be adjusted to show true costs. If it is discovered that 
the overhead rates have not been properly established, new 
rates should be prepared immediately and put into use as soon 
as practicable after errors of principle have been disclosed. 

In some businesses the selling prices for different lines, 
or for the entire product, are established in advance of pro- 
duction and are based on predetermined or estimated costs. 
In such a case, if costs are underestimated and it is impos- 
sible to correct the selling prices after they are once deter- 
mined, the manufacturer suffers a loss on orders taken in 
advance and priced upon overhead rates which do not cover 
the costs. This frequently happens when orders are accepted 
for future delivery. Selling prices of merchandise cannot then 
be changed until new orders are taken or a new season begins. 



l82 DETAILED FACTORY REPORTS 

Again, abnormal trade conditions sometimes cause or- 
ders to fall off, with a consequent decrease in production. 
Under tliese conditions, the overhead percentages or rates 
normally used are inadequate to apportion the total factory 
overhead over the decreased number of orders received when 
the plant cannot be kept operating full time. The question 
then arises as to whether or not to change the overhead per- 
centages and thereby increase the cost, which would necessi- 
tate raising the prices of the merchandise manufactured. If 
these abnormal conditions are temporary in character, a raise 
in prices may cause a still further decrease in the amount 
of orders received, whereas an increase in business is neces- 
sary. All these are points to be carefully considered when a 
change in the rates is contemplated. 

When the class of trade does not permit the absorption 
of abnormal overhead in the article cost, normal rates should 
be used as a basis for selling prices. The adjustments then 
necessary to cover the unabsorbed expense should be charged 
directly to the Profit and Loss account and should not be 
included in the overhead. 

When it is discovered that the rates are too low and that 
for several months overhead has been under-absorbed, it may 
be found impossible to absorb the unapplied overhead in the 
article cost. Under these circumstances any adjustments in 
the overhead accounts must be charged to the Profit and Loss 
account. No provision can be made for increasing the value 
of the merchandise on hand, for the reason that there is no 
basis for apportioning the unapplied overhead to the cost of 
the articles sold and to the cost of those on hand. 

In like manner, when factory overhead is overapplied 
and adjustments need to be made, the price of the articles 
already shipped or sold cannot obviously be changed, while 
those in stock may be valued at too high an amount, and this 
may lead to the rendering of a false statement of financial 



DISTRIBUTION OF FACTORY OVERHEAD 



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l84 DETAILED FACTORY REPORTS 

condition. Whenever it is discovered that finished stock has 
been valued at too high a cost, some provision must be made 
for writing down this overvahiation to a proper cost basis. 
To sum up, the careful computation of accurate overhead 
rates is one of the most difficult and important matters in 
the operation of every cost system. The figures should 
represent true costs, and to achieve this end the calculations 
should be checked at the end of each cost period and any dis- 
crepancies corrected promptly. Only in this way can the in- 
ventor)'' valuations be accepted as reliable. 

Summary of Factory Overhead 

The items which make up the factory overhead and the 
methods of distributing them first to departments and then to 
product are summarized in Form 31. 



CHAPTER XII 

FACTORY OVERHEAD REPORTS 

The Source of Overhead Items 

Material reports are definite in character and are designed 
to record only material cost. The compiling of labor cost is 
also definitely provided for by especially designed time tickets 
or other labor reports. Factory overhead, being the most com- 
plex element of cost, is compiled from divers sources, and 
therefore the items are obtained from various records, some 
of v^hich are used for different purposes. 

In small manufacturing plants and under very simple 
conditions of manufacture, the information for compiling the 
factory overhead may usually be obtained from one record — 
the expense analysis record. In larger plants the sources 
from which the factory overhead items are derived are nu- 
merous and the items are compiled in many different ways. 
These sources of information are discussed in this chapter. 

Reports for Recording Indirect Material 

The indirect material items, as already stated, consist of : 

1. Direct material which cannot be applied in a direct 

manner 

2. Supplies 

3. Scrap material 

4. Small tools and dies 

The cost of direct material which cannot be applied in a 
direct manner and which in consequence forms part of the 
factory overhead, would be obtained from an analysis of ma- 
terial requisitions. The details of these requisitions should 

185 



l86 DETAILED FACTORY REPORTS 

be summarized separately and a means provided for includ- 
ing them in the factory overhead at the time all other items 
of direct material are summarized and charged to the various 
departments, jobs, orders, articles, or processes. 

Miscellaneous supplies are used by almost every depart- 
ment of a plant, and the sources for ascertaining their cost 
would also be the material requisitions. These should provide 
information enabling them to be summarized by departments 
so as to obtain the indirect cost of the supplies used in each 
case. 

In large manufacturing plants indirect material and sup- 
plies are sometimes transferred from one department to an- 
other. When this is done, the department making the trans- 
fer should receive proper credit so that the department receiv- 
ing the items may be charged for their use. If separate de- 
partment stock records are not kept, transfers should be re- 
corded upon especially designed reports. These should be 
summarized so that each department can be charged with the 
indirect material and supplies it has used. 

Complications sometimes arise in the treatment of scrap 
material as a part of the overhead. Such portions of this ma- 
terial as can be used again for manufacturing other articles 
should not be included as part of the overhead cost. The 
overhead includes only such scrap material as is worthless 
and cannot be utilized again in the manufacturing operations. 

Scrap material charges applicable to the factory overhead 
are generally recorded upon a specially designed scrap ma- 
terial report which is compiled daily, weekly, twice a month, 
or monthly, as required. This report gives details as to how 
the scrap originated and also details as to kind and quantity, 
with a complete description of its nature and final disposition. 

In large plants where complete information of this kind 
is obtainable the scrap material reports must be specially 
handled, and in some cases credit must be given to the cost of 



FACTORY OVERHEAD REPORTS 187 

a particular job, order, or article from which the scrap is de- 
rived. In these instances the scrap naterial reports would 
show the job or order number, or the name and number of 
the process so credited. The reports would then be sum- 
marized for the purpose of ascertaining the total charge to 
the scrap material accounts, and also the total credit to the 
direct material accounts. In addition to this summarization 
the detailed scrap material reports would be posted as a credit 
or deduction from the material cost of each particular job, 
order, or process affected, the entry being made upon the re- 
spective cost sheets for each job, order, or process. 

The cost of perishable tools and dies which are a charge 
to overhead may, when it is practicable to trace their consump- 
tion, be recorded upon especially designed tool reports. In 
large manufacturing plants, however, this is not always pos- 
sible, as items of this character are required by the operators 
daily and in consequence are loosely handled. To keep track 
of them, stock records should be kept on which they are 
charged to employees as issued. Individual employees can 
then be held responsible for any tool which disappears or is 
broken while in their possession. While this is theoretically 
the best way of handling these items, in actual practice they 
are often charged to overhead by means of a depreciation 
rate or a certain fixed amount to cover the probable loss 
through wear and tear. If complete records are kept of the 
use of tools by departments, these records would, of course, 
provide a means for charging the cost of oerishable tools and 
dies to the overhead of the respective departments in which 
they are used. 

In small plants, where a stock-room is not operated and 
stock records are not kept, the cost of indirect material can 
usually be obtained from the purchase records and distribution 
book or purchase analysis. When miscellaneous supplies are 
purchased for particular operating departments, the invoices 



l88 DETAILED FACTORY REPORTS 

for the goods are charged on the purchase book directly to 
the overhead of the departments where the supphes are to 
be used. 

Reports for Indirect Labor 

Indirect or non-productive labor, supervision or foreman- 
ship, superintendence, inspection, factory clerks' salaries, de- 
fective and experimental work, as well as the time of produc- 
tive workers not applicable to a definite job, order, or article, 
should all be charged to the factory overhead. The last item 
mentioned includes all lost, idle, and waiting time, and pro- 
vision must be made for obtaining information as regards 
such time from the various labor reports which are submitted 
daily by the factory employees. 

In some large factories all non-productive time is re- 
ported upon separate non-productive time or labor reports. 
This simplifies the preparation of the analysis of overhead 
charges, and the amount to be charged to department overhead 
is then very readily obtained. 

The time of miscellaneous helpers, truckers, sweepers, re^ 
pairmen, etc., who do principally non-productive work is 
often compiled separately when the pay-roll is prepared, en- 
abling this portion of the non-productive charge to be obtained 
readily from the pay-roll records. In most instances the pay- 
roll records are ruled so as to distinguish between the produc- 
tive and non-productive time of departments, thus making 
unnecessary any detailed analysis. 

Productive and non-productive work should, if possible, 
be accounted for upon separate labor reports. This is espe- 
cially true when productive workers are transferred to non- 
productive work and vice versa, either in or between depart- 
ments. As in the case of supplies, transfers of labor of this 
character should be summarized by departments so that the 
total charge and total credit affecting each may be obtained. 



FACTORY OVERHEAD REPORTS 189 

The expense of supervision by foremen and others is a 
more or less fixed item of overhead which, as a rule, may 
be obtained from the pay-roll records. It is rarely necessary 
for the supervisors to account for their time daily, except in 
small shops where foremen sometimes do productive work 
in addition to their regular work of supervision. When this 
is the case, the problem arises as to the correct amount to be 
charged to the particular job, order, or article for the fore- 
man's time. 

It would be obviously incorrect to burden the cost of the 
product with a high rate for the foreman's productive time 
when such work is undertaken as a matter of necessity, as 
for instance, to help out the production of the job, or to 
take care of rush work, or to do work of a special character. 
Under these circumstances, a regular day or hourly work rate 
should be established, based on the average wage rate paid for 
such work in the department. This rate is used for ascertaining 
the cost of the direct labor charge which is to be applied to the 
cost of the article produced. When the foreman's productive 
time is charged as a direct labor cost, the overhead account of 
his department should receive credit for the same amount, 
thus reducing the expense of supervision. 

In large manufacturing plants the salaries of the factory 
superintendent, assistant superintendent, and production man- 
ager are included among the general operating expenses and 
with them finally distributed to the departments. The amount 
of this charge is usually shown on the pay-roll. 

When inspection charges are treated as part of the factory 
overhead, their amount is obtained from labor reports and 
pay-roll records. The total should then be analyzed and either 
charged to departments or included in the general operating 
expenses. 

Factory clerks' salaries are, as a rule, shown on the pay- 
roll records, and their total time is usually chargeable to over- 



190 



DETAILED FACTORY REPORTS 



head. However, in small plants where one set of clerks di- 
vide their work between the financial and the manufacturing 
ends of the business, only that portion of their time which is 
properly a factory expense should be charged to overhead. 
The distribution may be based on an estimate of the time 
spent on each class of work. In large plants, where the de- 
partments are well organized, the factory clerks' time, in- 
cluding clerks in the operating departments of the factory, 
stock clerks, pay-roll clerks, cost department clerks, etc., is 
charged directly to the department in which the clerks are 
employed. In this way their salaries are absorbed in the over- 
head and distributed to the product. 

The salaries of the employees who devote their time to 
correcting defects in the product and to experimental work are 
often charged to a separate department account termed "De- 
fective Work" or "Experimental Work," which is treated as 
non-productive. In large manufacturing plants, instructions 
for such work are issued upon special factory orders. When 
this is done the material and productive labor costs of each 
order are compiled upon a separate cost sheet, to which over- 
head is added in accordance with the method of distribution 
which best suits the conditions of work in the department. 

After the total cost of the defective or experimental work 
is ascertained, it is charged to Defective Work or Experimental 
^^''ork account. The charges thus made may then be trans- 
ferred to accounts which have a tangible asset value, or a 
portion of these costs may be absorbed in the factory over- 
head under the caption of "Defective Work" or "Experimental 
Work," and in that way applied to the cost of the rest of tlie 
product manufactured. 

Indirect Expenses — Fixed Charges 

It should be noted that certain items of overhead such as 
rent, insurance, taxes, interest, and depreciation are more or 



FACTORY OVERHEAD REPORTS 



191 



less "fixed"' in character. These are so termed because they 
are incurred whether the plant is operated or not. Hence 
they are not affected by the volume of production and often 
the same amount of charge is incurred each period. Provi- 
sion must be made for charging these items to production 
monthly or periodically, depending upon whatever cost pe- 
riod is established. In simple cost systems this can be done by 
entries at the end of each cost period. In some instances it is 
quite practicable to provide for recording these items through 
the purchase records or register of accounts payable, but in 
large plants where departments are numerous, considerable 
time may be saved by the preparation of schedules of fixed 
charges. 



SCHEDULE OF RENT CHARGE 

For the year 19 


Accounts 


Monthly 
Charge 


Postings to Accounts 


Jan. 


Feb. 


Mar. 


Apr. 


Etc. 


Dr. Cutting Dept 


$150.00 

300.00 

350.00 

150.00 

50.00 

75.00 

75.00 

150.00 

200.00 












Machining Dept 

Assembling Dept 

Finishing Dept 


Trimming Dept 

Inspecting Dept 

Packing Dept 

Stock-Room Dept 

Warehouse Dept 


Cr. Rent 

1 


$1,500.00 













Form 32, Schedule of Fixed Charges. (Size, 8 x 5.) 



192 



DETAILED FACTORY REPORTS 



A simple schedule of rent charge is illustrated in Form 
32, on which a single entry of the monthly fixed charge may be 
made to cover the whole year. A check mark placed in the 
spaces for the charges affecting each department each month 
indicates that the items have been gosted to their proper ac- 
counts. 

Maintenance, Repairs, and Renewals 

The method of recording charges for maintenance, re- 
pairs, and renewals depends upon the size of the plant and the 
organization of the departments. In small plants repairs and 
renewals are usually made upon the authority of standing 
factory orders, to the order numbers of which all costs for re- 
pairs are charged. At the end of the month the total costs of 
these standing orders are ascertained and charged to the 
Maintenance, Repairs, and Renewals account kept with each 
department of the plant. In this manner they are absorbed in 
the departmental overhead. 

In large plants the cost of small repairs may be charged 
to standing order numbers, but for repairs of an important 
character special factory orders are issued. The direct ma- 
terial and direct labor cost of the job are charged to the cost 
sheet of the particular order covering the special repairs. 
When the work is completed, the overhead on the job is added, 
after which the total cost of the work is charged to the Main- 
tenance, Repairs, and Renewals account of the department 
in which the repair has been made. At the same time any 
departments which may have done work on the job receive 
credit. In large plants a mechanical millwright or repair 
department is usually organized to carry out all repairs, in 
which case credit for work done should be given to this de- 
partment. 

The question often arises as to whether it is correct to 
include overhead as part of the maintenance, repairs, and re- 



FACTORY OVERHEAD REPORTS I93 

newals cost. True costs consist of direct material, plus direct 
labor, plus overhead. Repair work must be supervised and 
recorded, machines and power are utilized, and space in the 
factory is also necessary. If these conditions are true, certain 
items of overhead necessarily enter into the repair cost. 
Furthermore, if repairs were done by outside contractors, these 
contractors in arriving at the amount to be charged for the 
repair, would include direct material, direct labor, overhead, 
and also a margin of profit. 

Power Expenses 

In a well-organized factory which operates its own power 
plant, material records are kept showing the consumption of 
the various materials and supplies used in producing power, 
from which are compiled the charges for these items. The 
wages of the power plant employees also are charged directly 
to this department from the pay-roll records, as well as the 
items of expense distributed to the power plant department and 
a proportion of the general operating expenses. After the 
total costs of the power plant have been determined in this 
way, they are distributed to the operating departments in 
proportion to the consumption of power in each. The record 
which is used for summarizing this information is often termed 
the "Power Plant Distribution Record" (Form 33). 

On the left half of the form are collected and summarized 
the power expenses for the period. The total of these divided 
by the horse-power hours (i.e., the total hours of running time 
multiplied by the horse-power generated) gives the unit charge 
for each horse-power hour. On the right half of the form 
the horse-power and the operating time of each machine are 
recorded in the first two columns. The multiplication of these 
two figures gives the horse-power hours chargeable to each 
machine, and this last figure multiplied by the unit charge de- 
scribed above gives the power cost of each machine. 



194 



DETAILED FACTORY REPORTS 



In small power plants it is difficult to record the con- 
sumption of material and supplies, and in such case it may be 
more practicable to take an inventory of the amounts on hand 
at the end of each month. If this is done, the value of the 



POWER PLANT DISTRIBUTION 

For the period 


RECORD 

, ig . 










Analysis of Costs 


Distribution 


Details 


Amount 


Machine 


Dept. 


Horse- 
Power 


Operat- 
ing Time 


H. P. 

Hours 


Power 
Cost 


Fuel 






1242 
1243 
1244 
1341 
1342 
1421 
1422 
1423 
1551 
1671 
1672 


A 
A 
A 
B 
B 
C 
C 
C 
D 
E 
E 










Water 














Oil and Supplies 

Engineer 






























Rent 




























Taxes and Licenses 

Depreciation 

Repairs and Maintenance 










































General Operating Exp, , 
Total 














-- 


--■ 















Cost per H P Hour 




Totals 












' 1 








1 



Form 33. Power Plant Distribution Record. (Size. 8 x 5.) 



mateirial consumed may be obtained by adding to the inventory 
at the beginning of the month all power supplies purchased 
during that month and subtracting the inventory on hand at 
the end of the month. This simple calculation often saves 
clerical time in small plants. 

Where storeroom accommodations are not available, ma- 
terials and supplies consumed in the power plant may be esti- 
mated. Under these conditions the best information obtainable 
snould he used, and the estimated figures should be revised by 



FACTORY OVERHEAD REPORTS 



195 



taking the actual inventory of the materials and supplies on 
hand at different times during the year. 

Freight and Cartage Inward 

When freight and cartage inward are treated as overhead, 
a freight analysis sheet should be used for compiling the 
charges to departments. This record, which need not be il- 
lustrated, is a simple columnar-ruled sheet so headed as to 
show the charges as they affect the different departments. 

In small plants freight and cartage inward is charged 
directly to one account which is closed out to general operating 
expenses and in that manner distributed to departments. In 
large plants the freight and cartage inward is usually charge- 
able in different ways; part of it may be added to the material 
cost, a portion absorbed in the total cost of the new equipment 
purchased, and the balance included as part of the factory over- 
head. Where this balance represents a large amount, provision 
should be made for its distribution either to departments or to 
the products manufactured. In most cases it is not necessary to 
design special forms for the distribution or analysis of freight 
charges, as an ordinary columnar sheet serves the purpose. 

Over, Short, and Damage 

This item of overhead is obtained from special factory 
reports. Where material is subject to shrinkage at the time of 
purchase, provision should be made upon the report of ma- 
terial received for recording any loss in weight or quantity. 
When shrinkage or damage takes place during the processes 
of manufacture, a separate departmental material report, or 
the production report, may be used for the purpose of inform- 
ing the cost department office. Increase in weight of ma- 
terial should also be reported in order that provision may be 
made in the office for changes as to quantity produced when 
summarizing the costs. 



196 DETAILED FACTORY REPORTS 

Reports showing overs, shorts, or damages should be de- 
signed to suit the special needs of each case so that the charges 
affecting the departments may be obtained. 

Distribution or Analysis Record 

When collecting the items of factory overhead it will be 
found that many of them can be obtained from incoming in- 
voices, which are analyzed by means of the purchase record, 
accounts payable vouchers, or the register of accounts payable. 

For the purpose of showing a more detailed analysis of 
expenses, the purchase record, or register of accounts pay- 
able, is supplemented by a "Distribution Record" or "Anal- 
ysis of Expense Record,'' the purpose of which is explained 
by its name. The record provides columns, or separate sheets, 
for compiling the various detailed items which should be 
charged to the accounts, showing the classification of the 
items composing the factory overhead expenses. A consider- 
able portion of the factory overhead items is thereby obtained 
from the distribution record at the time the invoices are en- 
tered in the purchase records. 

The items of overhead not found on the purchase records 
are taken from the records previously mentioned, such as the 
summary of material requisitions, the summary of depart- 
mental materials used, the analysis of labor reports, fixed 
schedules, and special distribution reports, such as power plant 
reports, freight analysis, summary of repair orders, and de- 
fective and experimental work accounts. 

Deferred Expense Record 

In every plant expenses are incurred which are only in 
part applicable to the current cost period. Items of this char- 
acter would include large repairs, insurance, prepaid taxes and 
interest, experimental work for the benefit of futuie opera- 
tions, and purchases of stationery and miscellaneous supplies. 



FACTORY OVERHEAD REPORTS 



19; 



As only part of these items or expenses are consumed during 
the current month, provision should be made for distribu- 
ting them over several months' operations. To this end such 
expenditures should be charged to a suitably named deferred 
expense account which is credited at the end of each period 
with the portion of the charge applicable to the current period. 
If the items of this character are numerous, a "Deferred 
Charges" account may be used to control a subsidiary record 
in which the details of the deferred items would be shown. 

Summary of Factory Overhead Reports 

Form 34 summarizes the records and reports used for 
the purpose of collecting and distributing the items of factory 
overhead. 



Factory 

Overhead 

Reports 



Indirect Material 
Indirect Labor 
Fixed Charges 
Repairs and Renewals 
Power, Light, and Heat 
Freight and Cartage Inward 
Over, Short, and Damage 



Material Requisition 
Material Reports 

Labor Reports 
Pay-Roils 
Special Reports 

Fixed Schedules 

Cost Sheets 
Material Reports 
Labor Reports 

Power Distribution 
Power Plant Report 

Invoices 
Freight Analysis 

Special Factory Reports 



Form. 34. Classification of Factory Overhead Reports 



CHAPTER XIII 

METHODS OV REPORTINC; PRODUCTION 

Purpose of a Production Report 

As explained in Chapter V, a factory order is the notifica- 
tion to the production departments to commence work upon 
a job, order, or article, the progress on which is shown by 
means of detailed material and labor reports. Another im- 
portant link in the cost records is the production report (Form 
35). This is a form used for the purpose of notifying the 
office that the work on a particular job, order, or article has 
been completed, and that the product is ready either for 
shipment or to be stored in one of the various stock-rooms 
of the plant. The production order starts the manufacture of 
the product, while the production report records quantity pro- 
duced. 

Form of Production Report 

There are many kinds of production reports, the form 
of each and the kind of information furnished depending upon 
the use to which it is put and the method of cost-finding em- 
ployed in that particular case. In general, however, these 
reports may be classified as follows : 

1. Simple production reports without provision for re- 

cording costs. 

2. Simple production reports, provision being made for 

recording costs. 

3. Factory orders used as production reports. 

4. Material reports used as production reports. 

5. Labor reports used as production reports. 

198 



METHODS OF REPORTING PRODUCTION 



199 



Simple Production Reports 

Form 35 illustrates the simplest form of production re- 
port. It is prepared at the end of each day by the operating 
departments and provides for showing the order number, 



DAILY PRODUCTION REPORT 

Department 

No 

Date 


Order No. 


Quantity 


Description 

































Approved by 

Posted to Stock Records. 

Posted to Summaries 

Posted to Cost Sheet 



Prepared by. 



Form 35. Daily Production Report — Simple Form. (Size 8 x 11.) 



quantity, and description of the work completed. It is num- 
bered and dated, the number being placed upon it in advance 
so that it may be known whether or not all reports are re- 
ceived at the office. The quantity column is used for the pur- 
pose of showing the partial completion of a production order 



200 DETAILED FACTORY REPORTS 

when this covers the manufacture of a large number of articles 
requiring several days or possibly weeks for their comple- 
tion. 

It should be noted that the form shown does not provide 
space for recording costs. If necessary, columns may be 
added to show total cost as well as the details of the material, 
labor, and overhead costs of departments. If this is done, the 
signature of the person checking the production report and 
entering the costs should be placed at the bottom of the form; 
also the person who proves the mathematical accuracy of the 
figures should sign the report as evidence that the work has 
been checked before the costs are transferred to the summary 
record. 

If the order method of cost-finding is used, the question 
arises as to the necessity of entering a description of each 
order on the production report. In view of the fact that er- 
rors in reporting order numbers are apt to be made, the entry 
of a description provides a means for identifying the order 
and thereby eliminates the possibility of error. If the order 
numbers reported could, however, be relied upon, a production 
report might take the form of a list of these numbers showing 
the work completed each day. 

Under the process method of cost-finding, the same sim- 
ple forms may be used if numbers are assigned to definite 
units of production, even though the costs are compiled for 
processes. If the volume of production is not specified before- 
hand, it is not necessary to designate the completed product 
by means of a number; the quantity and description of the 
articles produced suffice. If detailed costs are required and 
provision is made for recording them, an additional total cost 
column should also be provided for the purpose of proving the 
mathematical accuracy of the figures. The total of the ma- 
terial, labor, and overhead columns would then equal the 
amount entered in the total cost column. 



METHODS OF REPORTING PRODUCTION 201 

Production Reports Showing Progress of Product 

Production reports which show department costs may be 
used for the purpose of crediting the operating departments 
when work is transferred from one department to another. 
When one department is credited, either another department or 
the stock-room account should be debited, depending upon the 
disposition of the product. In this connection it should be re- 
membered that material in process is usually transferred from 
one operating department to another, while finished or partly 
finished product may be stored as manufactured parts or 
finished parts stock, or may be immediately shipped ; or finally, 
some of the finished parts may be sent to the raw material 
stock-room to be again requisitioned for the manufacture or 
assembly of the finished product. 

To avoid undue clerical work in factory departments, 
in many cases the disposition of the processed material is not 
shown upon the production reports, especially when factory 
routine is standardized and cost clerks can ascertain the dispo- 
sition of the product by referring to standard practice sched- 
ules. Under conditions where this is not practicable, it may 
be necessary to provide columns on the production report to 
show the disposition of the processed material or the manu- 
factured product. 

Factory Orders as Production Reports 

The factory order may also be used as a production re- 
port, the return of the order to the office after the work has 
been completed constituting a notification of this completion. 
The duplicate departmental copies are often used for this 
purpose, each department turning in its own copy of the order 
as soon as its part of the work is finished. These notifications 
furnish the data for preparing a production summary, and 
copies of the factory orders used in this way are virtually pro- 
duction reports. 



202 DETAILED FACTORY REPORTS 

Tag and Coupon System of Production Report 

A production order in the form of a tag, giving a de- 
scription, quantity to be manufactured, and order number is 
sometimes attached to the material itself or to a container 
which holds the material. The tag accompanies the goods 
through the processes of manufacture until they are completed, 
when it is sent to the ofifice as a notification of completion, thus 
constituting a production report. The tag system is sometimes 
developed to show the quantities transferred from one depart- 
ment to another. When this is done, columns should be ruled 
on the tag to show the movements by departments of the quan- 
tity received, by whom received, date received, quantity pro- 
duced, and date transferred. This provides a means for keep- 
ing track of the flow of materials between departments, and 
for placing responsibility when discrepancies arise or mate- 
rial is lost in transit. 

To illustrate the operation of the tag system, it may be 
assumed that in the cutting department of a garment factory 
an entry is made upon the production tag showing that the 
material for a dozen garments has been cut. When the ma- 
terial is transferred to the sewing department the forewoman 
of this department signs for its receipt on the tag, and when 
the tag leaves this department together with the finished gar- 
ments for which the material is used, an entry is made upon it 
showing that one dozen sewed garments are sent to the rib- 
boning department where the receipt is again signed for. In 
this way the tag or ticket follows the order through the operat- 
ing departments until the goods are completed and the stock- 
room or shipping-room clerk signs for their receipt. It is then 
sent to the office where it constitutes the production report. 

Under complex manufacturing conditions, the tag system 
may be further developed by the use of coupons which enable 
the production report to be prepared in the office in advance. 
The stub to which the coupons are attached shows the order 



METHODS OF REPORTING PRODUCTION 203 

number, description of the work, date started, date to be com- 
pleted, and so on. The coupons themselves provide spaces 
for recording the order number shown upon the stub, the 
coupon number, and the quantity produced, both good and 
defective. Each coupon represents one or a series of manu- 
facturing operations, so that when detached and sent to the 
office as the various operations are completed, they provide 
information as to the progress of production. 

After all coupons have been received at the office, the 
stub is sent with the goods to the stock-room or shipping de- 
partment, a signature on the stub being required at this point 
to certify that the quantity received is correct. Emphasis must 
be placed upon the importance of this check upon the quantity 
at the point where the articles are shipped or stored. The 
stock-keeper or shipping clerk may either make out a separate 
report or sign the production stub as explained above, but 
unless the quantity designated on the production report tallies 
with the quantity shipped or taken into stock, unit costs can- 
not be accurately ascertained. After the production stub has 
been receipted, it is returned to the office where the summary 
of production prepared from the miscellaneous coupons is 
compared with the data entered on the stub. 

An advantage of the coupon over the simple form of 
tag is that it enables work in progress to be readily traced by 
looking up the last coupon received in the office and noting 
from which department it was sent. In designing coupons 
care should be exercised to see that the order of the operations 
is reversed, so that the first coupon to be detached (the bottom 
one) represents the first operation and the last coupon the last 
operation. 

Material Reports as Production Reports 

Under some conditions of manufacturing, material re- 
ports may also serve the purpose of production reports. This 



204 



DETAILED FACTORY REPORTS 



is especially true in manufacturing industries where a fixed 
formula is used for a definite quantity of product. As an il- 
lustration, in the manufacture of chemicals, or paints and var- 
nishes, the formulae are fixed as to kind and quantity of ma- 
terials required to produce a certain yield. Under these con- 
ditions the material report, or the bill of material which serves 
as a requisition for raw materials, may also serve the purpose 
of a production report when returned to the office. A special 
production report is then unnecessary, as the insertion of addi- 
tional spaces for quantity produced, date transferred to stock, 
and signature showing its receipt are sufficient for the pur- 
pose. Material reports may be used in this way under both 
the order and process methods of cost-finding. 

Labor Reports as Production Reports 

Where a piece-rate, bonus, or premium plan of paying 
wages is used, the labor reports of the employees may be de- 
signed to serve as production reports. When this is done, a 
thorough check of the quantity produced is essential, and an in- 
spector's O K should be placed upon individual labor tickets to 
signify that the articles have been counted and inspected and 
that the quantity reported has been actually produced. In 
some industries the labor tickets are made up in coupon form, 
the return of the coupons to the office signifying that definite 
quantities of articles have been produced. This method of re- 
porting production by means of the labor reports is applicable 
to both the order and process methods of cost-finding. 

Defective Work Reports 

A defective work report (Form 36) is a specialized form 
of production report, the purpose of which is to report any 
defects in the product discovered during the process of manu- 
facture. The office should be notified of these defects so that, 
if possible, they may be corrected and the product made sal- 



METHODS OF REPORTING PRODUCTION 



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2o6 DETAILED FACTORY REPORTS 

able; if this cannot be done, the defective product must be 
scrapped and disposed of in some other way. If there is any 
rivalry between operating departments as to which can make 
the best record and the foremen of all operating departments 
receive copies of the summary of defective work, it will tend 
strongly to lessen losses from this cause. 

Spaces may be provided on the report for showing the 
date and the cost of correcting defective work. Under some 
conditions this cost may be charged to the cost of the particular 
job or order of which it is a part; under other conditions it 
may be charged to a departmental overhead account, and in 
that manner absorbed in the overhead. Whenever it is pos- 
sible to use some of the material again, it should be taken back 
into the Materials account at its scrap value and the difference 
in cost charged to a Defective Work account. 

Time of Reporting Production 

Production should be reported to the ofBce as promptly 
as necessity demands. Often time is lost and sometimes ma- 
terial, operating departments become congested, and deliver- 
ies cannot be made promptly, because prompt and adequate 
production records are not available. In large manufacturing 
plants a tracing department sometimes reaches an exaggerated 
size for the reason that the information given on production 
reports is inadequate and production is not reported on time. 
A thorough system of reports would provide the office with all 
the necessary information for answering questions and tracing 
jobs, orders, or articles through the various operations. 

Local conditions would govern the time of reporting pro- 
duction, but under ordinary circumstances production should 
be reported daily ; that is, no reports should be allowed to 
accumulate in the factory and held there to be summarized at 
the end of the period, when the original records could be sent 
to the office in the form of a daily report. 



METHODS OF REPORTING PRODUCTION 



207 



Disposition of Product 

The product may be disposed of in various ways ; it may 
be shipped at once to the customer or taken into stores as manu- 
factured parts, part-finished stock, or finished stock. If defec- 
tive, it may be returned to the operating departments for the 
purpose of having the defects corrected. If it is for "home 
use" and in the nature of machinery, tools, and miscellaneous 
equipment, it may be transferred to plant asset accounts. 

The disposition of the product should be accurately indi- 
cated by means of reports so that the charges may be passed 
to the proper accounts. A production report is a notification 
that a particular department claims credit for work done, and 
when this credit is entered, an offsetting charge must be made 
to another account. When a standard product is manufac- 
tured for stock, the stock account must be debited. Where 
goods are made for special order and the finished product is 
shipped, this simplifies the accounting for the credits and 
charges. In large plants where the production system is com- 
plex, definite instructions covering the disposal of the product 
should be given to each operating department if cost informa- 
tion is to be accurately recorded. It is often practicable to 
indicate this by the color of the report. 

Procedure in Handling Production Reports 

The procedure in handling production reports may be 
indicated as follows : preparation, examination, recording, dis- 
position, and filing. The reports may be prepared by a clerk 
in the cost department, or by the factory foreman or his clerk. 
Before they are sent to the office they should bear the approval 
of the factory superintendent, production manager, or some 
other responsible person. Whether they are delivered to the 
office by the factory clerk, or collected by a messenger on his 
rounds, is immaterial provided they reach the office at regular 
stated intervals. 



2o8 



DETAILED FACTORY REPORTS 



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METHODS OF REPORTING PRODUCTION 209 

When the reports are examined in the office for their cor- 
rectness, care should be exercised to see that the proper order 
numbers are given and that the descriptions are sufficient to 
identify the orders in case of necessity. The examination 
should also disclose whether the reports are properly dated, 
numbered, and signed, so that the responsibility of the person 
making or approving them is fixed. 

If the reports provide spaces for recording costs, the de- 
tails of these would be obtained from the cost sheets or other 
cost records. If costs are recorded on the reports, provision 
must be made for ascertaining the total material, labor, and 
overhead costs to be credited to the departmental accounts. 
This work should be arranged so as to permit of a proof being 
made of the accuracy of the calculations. 

The disposition of the product will indicate the offsetting 
debit to the above credit — either a charge to a stock account, 
an expense account, or a plant asset account, as the case may 
require. A mathematical proof should also be established for 
this portion of the work. The completed and semi -finished 
product taken into stock should be entered upon the records of 
the stock-room in which it is stored. These postings should 
be made promptly each day and should be kept up to date so 
that a perpetual inventory of each item of stock is available. 

Production reports may be filed in various ways — accord- 
ing to the dates of the reports, the numbers of the reports, or 
the numbers of the departments from which they are received. 
In considering the method of filing, the main point is, of course, 
to be sure that ready reference can always be made to the orig- 
inal source of information. 

Summary of Production Reports 

Form 37 summarizes the detailed items to be considered 
in the routine of production and the devising of production 
reports. 



Part III — Compiling and Summarizing the Cost 

Records 



CHAPTER XIV 

COST SHEETS 

Scope of Cost Sheet 

After the material, labor, and overhead costs are ob- 
tained from the detailed factory reports, provision must be 
made for bringing the elements of cost together. The cost 
sheet on which the total cost of the job, order, or article, or 
process is compiled serves this purpose. The record thus fur- 
nishes the basis for charging the stock accounts with the cost 
of the finished product as reported by the operating depart- 
ments and for establishing a correct selling price. 

Cost sheets, often known by such terms as "Cost Cards," 
"Cost Records," "Job Cost Tickets," "Order Cost Records," 
"Process Cost Records," etc., may take the form of either 
loose-leaf sheets or cards. In some few instances they are 
prepared as ledger accounts and preserved in bound book form. 

Cost sheets are used to gather the cost of : 

1. All product which is manufactured and sold. 

2. All the necessary parts thereof. 

3. Machinery, tools, miscellaneous equipment, and all 

other items of a permanent value constructed for 
use in the factory. 

4. Repairs, renewals, betterments, and maintenance 

items, which are chargeable to the factory over- 
head. 

211 



212 COMPILING AND SUMMARIZING COSTS 

The Job or Order Cost Sheet 

The design of a cost sheet to meet particular needs is to 
some extent determined by the method of cost-finding in use. 
WTien costs are ascertained by jobs or articles it is usually 
necessary to make out a separate cost sheet for every factory 
order issued. But when a large number of factory orders 
are issued for similar products, these orders, as already stated, 
may often be conveniently grouped and the cost obtained for 
the group. This eliminates a large amount of detail work in- 
volved in the handling of each order separately. However, if 
the cost of each job is required in detail so that comparisons 
may be made, separate cost sheets may have to be compiled for 
each order. Another reason for doing this is to insure the 
accuracy of the detailed entries. If costs are compiled on cer- 
tain items of production only, the factory employees may dis- 
cover this fact and in consequence, when charging material 
and labor on the detailed reports, may enter their time inaccur- 
ately to jobs which they know are not being checked thor- 
oughly. 

The Process Cost Sheet 

Under the process method of cost-finding, the figures 
gathered on the cost sheets cover the cost of each process over 
a definite period of time which may or may not conform to the 
regular cost period. Thus, the process cost sheet gives the 
same information as a job order cost sheet regarding the mate- 
rial, labor, and overhead costs, the only difference being that 
the record relates to the quantity produced during a definite 
period of time and not to a given and predetermined quantity 
of production. The total cost shown should be divided by 
the total quantity produced to ascertain the unit process cost, 
and the cost of the various processes added together gives the 
total article cost. Form 38 illustrates the general method of 
summarizing the detailed cost of a particular process. While 



COST SHEETS 



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214 



COMPILING AND SUMMARIZING COSTS 



seemingly complicated, the study of the form will readily make 
clear the method of summarizing the cost of the process. 

Information in Heading 

In the heading of each cost sheet should appear informa- 
tion as to which order the costs gathered on the sheet apply. 
Under the order method of cost-finding, complete headings 
would consist of the following: 

1. Name of customer. 

2. Address of customer. 

3. Customer's order number. 

4. Instructions as to delivery. 

5. Date work is required. 

6. Name and description of article to be manufactured, 

with reference to blue-print number, drawing, 
sketch numl:>er, model number, or correspondence. 

7. Quantity of articles to be manufactured. 

8. Date of issuance of factory order. 

9. Date to be completed. 
10. Factory order number. 

The information entered at the top of each cost sheet, all 
or part of which may be essential, is obtained from the, copy 
of the factory order issued to the operating departments. In 
fact, these headings may be a duplicate carbon copy of the 
factory order, the details of which are taken from the cus- 
tomer's original order. 

The preparation of the headings of cost sheets may be 
done by the order department or by a clerk in the cost depart- 
ment to whom are sent copies of all factory orders. Different 
styles of cost sheets are often used in the same plant for gather- 
ing cost information on the various articles and processes as 
the occasion may require; therefore, whoever handles the 
work should be thoroughly familiar with the product so as 
to know exactly what kind of cost sheet to prepare. 



COST SHEETS 21$ 

Details Shown on Cost Sheets 

Though the uses to which cost sheets are put are more 
or less standardized, the amount of detail entered upon them 
differs greatly under diverse conditions of manufacture. In 
some cases all that may be required are the figures covering 
the three elements of cost. In other cases the information they 
contain may serve as a means of controlling the work in proc- 
ess in the various operating departments. In this connection 
they may be considered as subsidiary ledger accounts showing 
the details which go to make up the work in process inventory 
— in the same way as the raw stock records control the details 
of the raw material inventory. 

The varying amount of detail which cost sheets may con- 
tain is illustrated by the following enumeration: 

1. Total cost. 

2. Total material, labor, and overhead costs. 

3. Departmental material, labor, and overhead costs. 

4. The details of the material, labor, and overhead costs 

in each department. 

5. Transfer of cost from one department to another, 

provision being made for recording the total cost 
up to and including previous operations. 

Simple Form of Cost Sheet 

A cost sheet in its most simple form may be merely a tag 
or a ticket, such as is attached to the merchandise of a retail 
or jobbing concern, giving the cost and selling price of an 
article. Such a tag takes on the mark of a factory cost sheet 
when the cost of the article is divided into three elements as 
shown in Form 39. 

Such a form as this is often used under simple conditions 
of manufacture, or where predetermined or estimated costs 
(see Chapter XXVIII) are first figured and entered on a form 
to be compared later with the actual production figures. 



2l6 



COMPILING AND SUMMARIZING COSTS 




Name of Article 




Material Cost 




Labor Cost .... 




Overhead Cost 




Total Cost 










Selling Price 









Form 39. Cost Tag. (Size, 2 x 3.) 

Departmental Cost Sheets 

Where the factory is departmentalized it is necessary, for 
administrative purposes, to ascertain costs by departments. 
Form 40 shows the elements of cost in this way, in summa- 
rized form, the data being obtained from detailed records. 

The two simple forms so far presented are used either 



Name of Article 




























Total 
Cost 


Dept. 
No. I 


Dept. 
No. 2 


Dept. 

No. 3 


Dept. 

No. 4 


Material Cost 

Labor Cost 

Overhead Cost 

Total Cost 







































1 



Form 40. Departmental Total Cost Sheet. (Size, 8 x 3.) 



COST SHEETS 



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2i8 COMPILING AND SUMMARIZING COSTS 

under conditions where costs have been standardized, esti- 
mated, or predetermined, or where a summary of costs is de- 
sired. They do not provide for the postings of the detailed 
material and labor reports — a necessary procedure in the rou- 
tine of complete cost-finding. These details are often entered 
on separate departmental cost sheets, to which overhead is 
then added in proportion to the charge in each department. A 
departmental record of this character is shown in Form 41, on 
which the postings from material and labor reports are made 
directly. 

Detailed Summary of Costs 

When it is practicable to show the details of cost and 
their summarization by departments on the same record, there 
are obvious advantages to be gained by thus reducing the 
number of forms. The use of such a cost sheet, however, is 
only feasible when the kinds of raw material used are few in 
number and when the labor operations are comparatively 
simple. These conditions are usually found in a wood-work- 
ing plant and Form 42 which is used in this industry illustrates 
the method of summarizing the details of cost on a single 
sheet. The "summary of costs" and the detail of the "mate- 
rial costs" are gathered on one side of the sheet and the detail 
of the "labor costs" on the other side. 

A study of Form 42 shows that its ruling provides for 
summarizing the elements of cost of each customer's order by 
departments and comparing the total cost after freight is added 
with the list price. Into the method of recording the detail of 
material and labor costs it is needless to enter. The point 
here to note is that all the data relating to the cost of a particu- 
lar article are entered on one sheet and that reference thereto 
furnishes any detailed information that may be required. 

When the kinds of material used in manufacture are 
numerous, they may be conveniently printed upon the form. 



COST SHEETS 



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COMPILING AND SUMMARIZING COSTS 



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COST SHEETS 221 

Where production is planned and routed and in consequence 
the sequence of operations is fixed, details as to labor cost may 
also be entered upon the cost sheet in advance. In compiling 
costs, it is then only necessary to enter the figures as to mate- 
rial and labor consumption when the iob is reported finished in 
the various operations. 

Progressive Cost Sheet 

Another style of cost sheet, termed a "Progressive Cost 
Sheet" (Form 43), is used where the figures are carried from 
one department to another until the final costs are obtained. 
A separate record is employed for each operating department. 
In the first department no record is, of course, made under the 
heading "Previous Operations," but all the other columns are 
used. The material and labor costs are obtained from the 
detailed material and labor reports, and provision is made for 
entering the indirect costs, depending upon the method of over- 
head distribution in use. The production of the department is 
shown and provision is also made for showing the total cost. 
When the work progresses to the next department, the cost of 
the previous operations is transferred, and so on cumulatively 
through the operating departments. 

Schedules of Estimated Costs 

In industries where the product is of small intrinsic value 
or where a large variety of articles are manufactured which 
differ one from another only in unimportant details, it is often 
impracticable to ascertain the cost of each kind or style of ar- 
ticle separately. In such cases the article cost is carefully 
estimated in advance of its manufacture; a number of articles 
which are similar in their style or design are grouped ; and the 
costs for the groups are then ascertained and compared with 
the estimated figures as a means of checking the cost of produc- 
tion. This method of cost-finding is explained in detail in 



222 



COMPILING AND SUMMARIZING COSTS 



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COST SHEETS 



223 



Chapter XXVIII. For the present all that it is necessary here 
to note is that when costs are predetermined in this way the 
cost sheet takes the form of ^'Calculation Blank" or "Estimated 
Cost Schedule" and is known as such. These differ in their 
form and general style, varying from a simple statement of 
material and labor cost to an elaborate schedule showing the 
details of all costs. 

Form 44 illustrates a calculation blank used in a garment 
factory. In making up the estimates the figures are based 



CALCULATION BLANK 

Article Style No.. 

Description 



Material Costs: 

Cloth 

Cloth 

Trimmings 

Trimmings 

Ribbons 



Labor Costs: 

Cutting 

Sewing 

Trimming 

Finishing 

Inspecting 

Pressing and Boxing. 
Overhead Costs 



Total 

SeUing Price. 



Approved by Prepared by. 



Form 44. Calculation Blank Used in Garment Factory. (Size, 6x1 1 .) 



224 COMPILING AND SUMMARIZING COSTS 

upon the opinion of either the designers of the garment, or that 
of the factory foremen and other supervisors. It will be noted 
that the estimates are prepared for the quantity, kind, and price 
of material, the time, amount, and kind of labor, and the over- 
head. In this way a selling price can be determined in ad- 
vance of manufacture. 

Standard costs, where these have been established, may 
also be used in making up the estimates. The information 
entered on the cost sheet then serves as a means of checking or 
comparing the current with the former costs of production. 

Posting Cost Information 

In entering up the cost sheets the transfers of entries from 
factory orders and labor and material reports oi summaries 
may be termed "posting"' and would include the following: 

1. Entering the data in the heading on the cost sheet. 

2. Posting material reports. 

3. Posting labor reports. 

4. Entering overhead costs. 

5. Entering quantities. 

Posting Material Reports 

The postings of material costs consist of the transfer of 
the information shown by the detailed material reports so as 
to ascertain the total material cost of the article manufac- 
tured. In posting this information, all or part only may be 
transferred from material reports. In some pases an entry of 
the date, material report number, and cost of material will 
suffice, the material reports themselves being attached to the 
cost sheet and filed with it. Often, in printing establishments 
for example, the cost sheet takes the form of an envelope in 
which the detailed reports are inserted, a summary of the total 
cost appearing on the outside of the envelope. 



COST SHEETS 225 

Where it is necessary to post complete information as to 
material costs on the cost sheets, the data should include : 

1. Date of material report 

2. Material report number 

3. Detailed description of material used 

4. Cost of material used 

The above data would be gathered from material requisi- 
tions, bills of material, departmental material reports, material 
transferred reports, credits for materials returned to stock- 
room, and any other specialized material reports. 

Posting Labor Reports 

As in the case of material postings, the postings of labor 
costs may include part or all of the following information 
shown upon the labor reports : 

1. Date 

2. Operator's number and name 

3. Time worked 

4. Quantity produced 

5. Labor cost 

Where the labor is constantly changing, it may prove ad- 
vantageous to have the names of employees appear upon the 
cost sheets in addition to their numbers. If an envelope form 
of cost sheet is used, a summary of the labor cost may be en- 
tered upon the outside of the envelope and the labor reports 
filed inside. In instances where the overhead distribution is 
based upon time, the total hours worked on the job or process 
must be recorded. To sum up, the conditions in each case 
must determine the precise data to be entered on the cost sheet. 

Entering Overhead Costs 

In all cases provision should be made for entering on the 
cost sheet the overhead or special expenses applicable to the 



226 COMPILING AND SUMMARIZING COSTS 

job, order, or article to which each form relates. If the over- 
head rates are fixed, overhead costs may be added as soon as 
the work is completed in each department. Where the rates 
fluctuate, it may be necessary to postpone the overhead cost 
entries until the rates are obtained at the end of the cost period. 
Overhead costs, as a rule, appear only upon the summary of 
costs. 

Under the process method of cost-finding, and where the 
machine rates for distributing the overhead are established and 
these machine rates include the labor cost, the labor and over- 
head costs are combined and appear as a combined amount 
upon the process cost records. 

Entering Quantities 

The cost sheet should always show the quantities pro- 
duced in each operation or process. This information is ob- 
tained from either the labor reports or production reports of 
the factory departments. It is essential to keep account of 
these quantities, as leaks of material can be discovered 
promptly only when this information is properly posted. Cost 
information is of value only when it is kept up to date. Too 
much stress cannot be laid upon the fact that all detailed re- 
ports should, where possible, be posted daily. 

Mechanical Aids for Posting Costs 

The posting of data to cost sheets entails much clerical 
labor which may often be saved by using a tabulating machine 
of some kind. Under certain conditions, and when a cost 
system necessitates a large amount of posting, one or more of 
these machines may be used to advantage to record and com- 
pile costs speedily and accurately, with a corresponding sav- 
ing in time and the cost of clerical work. 

The compiling of cost information covers such a vast 
amount of detail that it is well to keep costs as nearly as pos- 



COST SHEETS 



227 



sible up to date. Often when this work is postponed until the 
job is completed, detailed material and labor reports are lost 
and true costs cannot then be obtained. If the information is 
compiled daily as the current reports come to hand, the figures 
are much more likely to be accurate than if records are allowed 
to accumulate until the origin of any doubtful facts or figures 
is forgotten. 

Checking Costs 

The accuracy of the information entered on the cost sheet 
is not to be depended upon unless a thorough system of check- 
ing costs is installed. Accountants often place too much em- 
phasis upon the mathematical accuracy of the work and give 
too little attention to the article cost as shown on the cost 
sheet. Material and labor reports may be disposed of 
promptly, and overhead costs may be carefully compiled, but 
unless the figures are checked so that the article costs are re- 
liable, the system is not serving its true function. Therefore, 
a method of checking the information compiled upon the cost 
sheet must be provided for. This may be done in one of two 
ways: 

1. By means of verification with the actual facts ob- 

tained from blue-prints, drawings, sketches, or 
models of the article manufactured. 

2. By means of a comparison with predetermined, esti- 

mated, standard, or previous costs. 

The checking of the data by the first method requires a 
practical man who understands the material and labor require- 
ments from the information at hand as shown by blue-prints, 
drawings, etc. If the figures are found to be incorrect, an 
investigation should be made and the matter taken up with the 
foremen of the departments in which the discrepancies arise. 
Errors may be due to carelessness in posting or to mistakes in 



228 COMPILING AND SUMMARIZING COSTS 

the detailed material and labor reports of factory employees. 
If material and labor costs are entered inaccurately and the 
source of the error cannot be discovered, the probabilities are 
that other jobs, orders, or articles are being charged too much 
or too little. After the material and labor costs are checked, 
the overhead cost should be recalculated. Where standard or 
process costs are used, the current figures may be compared 
with those of previous periods. This comparison is important, 
as it often shows discrepancies the rectification of which re- 
sults in a more accurate method of estimating and in the 
elimination of inefficiencies. 

When a bid or selling price is based upon an estimate of 
cost, the actual cost should always be compared with the esti- 
mate as a means of determining the correctness of the orig- 
inal bid or quotation. 

In cases where it is necessary to change the figures of cost 
sheets, provision should be made for summarizing the adjust- 
ments and including them in the entries made to the controlling 
accounts. . 

Summary of Procedure 

The procedure in handling cost sheets may be summarized 



as 



1. Preparing the cost sheets. 

2. Posting the information as shown by the detailed 

material, labor, overhead, and production reports. 

3. Compiling and proving the costs; that is, adding the 

departmental material, labor, and overhead costs 
and transferring the results to the summary of 
costs so as to show the job, order, or article cost. 

4. Checking and comparing the costs so that discrepan- 

cies may be eliminated and true costs established. 

5. Disposing of the cost sheets, which would include 

transferring the costs to: 



COST SHEETS 



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230 COMPILING AND SUMMARIZING COSTS 

(a) The production reports 

(b) Stock records 

(c) Plant asset records 

(d) Other summaries 

Method of Filing Cost Sheets 

Cost sheets may be filed according to order numbers, 
names or numbers of articles, customers' names, customers' 
order numbers, or in various other ways. Whatever method 
of filing is adopted, a cross-index should be provided so that 
the sheets may be referred to promptly. If filed by customers' 
names, alphabetically arranged, it may be well to have an 
index by article and order numbers, so that any sheet may be 
referred to if the order number or name of the article only is 
known. If filed by names of articles, a cross-index by cus- 
tomers' names and order numbers should be provided. 

Summary of Method of Compiling Cost Sheets 

Form 45 summarizes the information entered on different 
kinds of cost sheets and the method of posting and checking 
the data they contain. 



CHAPTER XV 

STOCK RECORDS 

Purpose and Kind 

Stock records and the method of keeping them are im- 
portant features of every cost accounting system, for the rea- 
son that they can be made to serve as a perpetual inventory 
of materials, finished parts, and finished product. Such an 
inventory obviates the necessity of taking a complete physical 
inventory at periodical intervals in the various storerooms and 
departments of the plant, and financial statements may be pre- 
pared at any desired period by using the information which is 
furnished by the stock records as a basis for compiling inven- 
tory values. 

Though the details of keeping stock differ in different in- 
dustries, the records are more or less standardized, and stand- 
ard forms are now supplied by the larger stationery and print- 
ing establishments. 

Method of Keeping Stock Records 

The stock records constitute the subsidiary ledgers which 
show the detailed movements of merchandise items. They are 
controlled by the stock accounts kept in the factory ledger or 
the general ledger. These stock records may be classified as 
follows : 

1. Raw material stock records 

2. Work in process stock records 

3. Finished parts stock records 

4. Finished product stock records 

5. Miscellaneous stock records 

231 



232 COMPILING AND SUMMARIZING COSTS 

Stock records sometimes show quantities only, or they 
may include monetary values. As a considerable portion of 
the detail work is eliminated if quantities only are shown, this 
is the common practice. When an inventory is taken the stock 
is priced at either cost or current market price, and the total 
values as shown on the detailed stock records are compared 
with the balances of the various controlling accounts. If any 
discrepancies are found, the necessary adjustments are then 
made between the controlling and the detail figures. 

The better practice, however, is to provide for showing 
monetary values on the records. When this is done, there are 
several methods of pricing the raw materials as they are with- 
drawn from stock. Stock issued may be priced at : 

1. The cost value of the goods which have been in stock 

for the longest period. 

2. The cost value of the goods which have been most 

recently purchased, i.e., the merchandise which 
has been in stock the shortest time. 

3. The highest cost, thereby charging the high-priced 

items to production first and thus guarding against 
a drop in their market value. 

4. The average price paid for all the merchandise. 

The above methods apply with equal force to all items of 
finished parts and finished stock, as the values of these tend to 
fluctuate in the same way as material values. No matter 
which of the four methods mentioned is used for pricing with- 
drawals from stock, it should be remembered that when a 
physical count is made or inventory is taken from the informa- 
tion on the stock records, values should be placed at cost or 
market price whichever is lower. It may then be necessary to 
adjust the stock records and controlling accounts so as to start 
the new period with values which will be in agreement with 
the inventory figures shown on the financial statements. 



STOCK RECORDS 233 

Raw Material Stock Records 

The raw material stock records show the value of the 
raw material received, stored, and issued. As their function 
is fully treated in Chapter VI, which deals with material and 
material reports, there only remains to consider here the 
various kinds of records. These may be grouped as : 

1 . Records covering the main stores, subdivided in some 

plants into direct material items and miscellaneous 
supplies. 

2. Records dealing with the items stored in various sub- 

storerooms throughout the plant. 

3. Records dealing with departmental storerooms where 

it is necessary to keep a supply of material or mis- 
cellaneous supplies on hand. 

Departmental storerooms are common in large plants 
where a standard product is manufactured and where part of 
the material and supplies must be close at hand to keep up a 
steady production. Under these conditions separate sets of 
distinctively designed records may be necessary. For in- 
stance, in a large furniture factory there might be separate 
stock-rooms and stock records for the lumber stored in both 
the general lumber yard and in the kilns. Other records and 
separate storerooms might be required for the large items of 
hardware used in manufacture, for the m.ain raw material 
items other than those mentioned, and for suppHes. 

Work in Process Stock Records 

As explained in the preceding chapter, the cost sheets con- 
stitute the inventory, i.e., the stock records of work in process. 
Thus any information required as to the value of work in proc- 
ess of a certain kind or in a particular department, can readily 
be obtained by classifying the cost sheets by kinds of articles 
manufactured or by departments. 



234 



COMPILING AND SUMMARIZING COSTS 



Finished Parts Stock Record 

The finished parts stock records show the value of all 
finished or manufactured parts stored in various locations of 
the plant. Like the raw material records, they may be divided 
into: 

1. Records for the main stores, which would probably 

cover all the finished parts stock. 

2. Sub-storeroom records showing the items of finished 

parts stock stored in various departments. 

3. Records for different classifications of the product; 

e.g., one set for the finished parts, another for 
the major or larger assemblies, and a third set for 
the minor or smaller assemblies. 

The same kind of form may as a rule be used for record- 
ing the finished parts stock items as is used for the raw mate- 
rial items. 

Finished Stock Records 

Finished stock records, as the term implies, relate to the 
salable product kept in stock. Different sets of records may 
be operated for: 

1. The product stored in the main warehouses. 

2. The stock stored in the branch warehouses. 

3. Any finished stock out on consignment. 

4. Reserve stock held especially for orders in hand. 

5. Different classifications of the product. 

Simple Types of Stock Records 

A simple form of stock record is illustrated in Form 46. 
This is used in a retail garment business, where a small quan- 
tity only of each article is carried in stock. When an item is 
taken into stock, details as to the date of receipt, style number, 
description of the garment, and cost price are entered in the 



STOCK RECORDS 



235 



columns provided for the purpose. After its sale the date, 
charge sale or cash sale number, and customer's name are re- 
corded. The form illustrated may be used in all cases where 
each item of stock is accounted for separately and when it 
is desired to keep a record of the turnover of certain styles or 
articles in a line. 





FINISHED STOCK RECORD 

Article 






Style 

No. 


Date 
Received 


Cost 


Date 
Shipped 


Sales 
No. 


Customer's Name 





















































































































Form 46. Finished Stock Record. (Size 8 x 11.) 



Form 47 is an equally simple type of manufacturing 
record which may be used for either raw material or finished 
parts stock. The ruling and the column headings are self- 
explanatory. 

Records of Stock Available for Unfilled Orders 

It is often desirable that the stock record should separate 
the stock available for future orders and that required for 
orders in process or received. When orders are taken long in 
advance, the question of prompt delivery becomes important. 



236 



COMPILING AiND SUMMARIZING COSTS 



FINISHED PRODUCTS AND PARTS 

Style Maximum 

Article Minimum 


Produced or Bought 1 


Used or Sold 


Balance 


Date 


Quantity 


Cost 


Amount 


Quantity 


Amount 


Quantity 


Amount 








































^ 






, 



Form 47. Finished Product or Parts Stock Record. (Size, 8 x 5.) 

The finished stock records should then show the orders re- 
ceived, the sales or orders filled, and the number unfilled — as 
illustrated in Form 48. Inquiries can then be answered 
promptly when the customer telephones or writes for informa- 
tion as to the delivery of merchandise still to be shipped. 



Consignment Records 

Consignment records for finished stock which has been 
shipped either on memo or on consignment should, if required, 
be devised to suit particular needs. Though a record of the 
goods on consignment is invariably kept either in the factory 
or in the general ledger accounts, in cases where such ship- 
ments are numerous and frequent it is well to keep a separate 
set of stock records covering the movements of the consigned 
stock. 



STOCK RECORDS 



237 



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238 COMPILING AND SUMMARIZING COSTS 

Semi-Finished Goods Stock Records 

Any seini-linished product that is not taken care of either 
by the cost sheets or finished parts records, may be recorded 
upon a separate set of part-finished or semi-finished stock 
records. These are so closely allied with finished parts stock 
records that they may be treated in the same way. Where it is 
necessary to send raw materials and work in a partly completed 
stage to outside contractors, this material is really sent on 
consignment, payment being made for the labor expended upon 
it when the goods are returned. It is necessary to keep a 
complete record of the movements of this class of material. If 
the merchandise is returned promptly, say within a week or 
two, a copy of the invoice rendered when the work is sent out 
may serve for record purposes. After its return this copy 
may be given to the contractor as a receipt of delivery, or an- 
other invoice may be prepared showing the payment for the 
work done. This procedure eliminates the necessity of keep- 
ing stock records. When material remains out for a con- 
siderable length of time, it may be necessary to keep track of 
it by means of more complete records. 

Procedure in Handling Stock Records 

Stock records are virtually ledger accounts and therefore 
should be treated as accounting records. The procedure may 
be summarized under the following headings : 

1. Starting the records with the inventory balance. 

2. Posting the charges. 

3. Posting the credits. 

4. Testing their accuracy. 

5. Proving with factory accounts. 

6. Proving with physical inventories. 

7. Balancing and adjusting. 

8. Filing. 



STOCK RECORDS 239 

Entering Inventory Balances 

A cost system can give accurate results only when the orig- 
inal inventory is accurate. The opening inventory should in- 
clude the quantity and value of all raw material, work in proc- 
ess, finished parts, and finished stock. All these quantities 
and values must be transferred to the stock records and this 
information constitutes the first set of entries thereon. 

Posting Charges and Credits 

The charges posted to the different stock records are ob- 
tained from various sources, such as invoices, material re- 
ceived reports, material transferred reports, stock transfer 
reports, and production reports. The credit entries would be 
obtained from material requisitions, reports of shipments, pro- 
duction reports, and miscellaneous stock transfer reports. 
Postings should be made daily if possible, so that the records 
may always show the true state of the inventory. 

In posting the various charges and credits, the method of 
determining the prices should be well understood and estab- 
lished in accordance with a standard practice which should 
be consistently adhered to. 

Testing, Proving, and Adjusting 

The balances of the stock records should, from time to 
time, be compared with the actual quantities on hand. The 
raw material, finished parts, and finished stock items may be 
tested at regular intervals during the year to insure the records 
being in agreement with the actual facts. The work in process 
stock records, i.e., the cost sheet figures, should be checked at 
the end of each cost period, especially on those jobs which have 
been in process for a long time. Under lax conditions it is not 
uncommon for a job to leave the operating departments and 
be disposed of in some way without its being reported to the 
office. A cost sheet showing a portion of the accumulated 



240 



COMPILING AND SUMMARIZING COSTS 



costs might remain in the office and no disposition be made of 
the item because the foreman or factory clerk has failed to 
report that the work or job has been completed. Such work 
in process should never be allowed to remain dormant, and 
all inactive items should be investigated and properly disposed 
of by means of accounting adjustments. In factories where a 
large number of small orders are always in process, uncom- 
pleted work tends to accummulate and congest operations. 

The frequency with which the various stock records may 
be proved with the controlling accounts will depend, to a large 
extent, upon whether or not money values are recorded on the 
detailed records. When money values are shown, a detailed 
list of the balances may be prepared at the end of each cost 
period or at such time as proof is desired. This list consti- 
tutes a trial balance of the stock records, and the total of all 
the balances should be in agreement with the balances of the 
different controlling accounts as shown in the factory ledger 
or the general ledger. 

If money values are not shown upon the detailed stock 
records, a proof is made at such time as physical inventories 
are taken and the stock items are priced. When this is done 
it may be necessary to adjust differences between the detailed 
and the controlling balances. Such discrepancies may be due 
to errors in figuring or to differences which arise in calculating 
the material reports when the figures run to fractions or several 
decimal points. When adjustments are found to be necessary, 
an attempt should be made to discover the cause of the dis- 
crepancies and to eliminate the inefficiencies of which they 
are evidence. 

Loose-Leaf Versus Bound Stock Record 

Stock records may be kept in the form of a bound book, 
loose-leaf sheets, or upon loose cards. As they are in fact 
ledger accounts, they should take the form of a ledger showing 



STOCK RECORDS 241 

debits and credits. In deciding which is the most serviceable 
form, the size of the record should be considered. Large 
cards are unwieldy to handle, and if it is decided that they 
should be used, an effort should be made to keep them within 
the standard sizes so as to permit their convenient manipula- 
tion. Loose-leaf sheets or cards are more practicable than 
bound stock records, as the records of slow-moving or obsolete 
stock items can be removed from the binder or file, there- 
by saving time in reference. 

Obsolete Stock Record 

In every stock-keeping system, records of slow-moving or 
obsolete items of stock should be eliminated. It is often prac- 
ticable to keep a separate ''obsolete" section for these ques- 
tionable items, in which the records relating thereto are filed. 
In large manufacturing plants obsolete or "dead" items tend 
to accumulate. Provision should be made for keeping a close 
watch over this tendency and reducing the "dead" items to a 
minimum, thus economizing in the capital investment. 

Filing Stock Records 

The filing and arrangement of the stock records will de- 
pend to a large extent upon the classes of merchandise carried 
in stock. If the items are known by definite symbols, the 
records may be arranged and filed according to the symbols 
used. Symbols, it may be noted, are a useful and time-saving 
means of referring to a large number of records, and as nu- 
merous postings have to be made to these records it will be seen 
that a quick means of reference is a desirable feature. When 
numerous sizes of each article are kept in stock it is some- 
times convenient to summarize the various sizes on one stock 
record, this main record being supported by individual records 
showing the quantity on hand of each size. 



CHAPTER XVI 

SUMMARIZING RECORDS— CHARGING FACTORY 
EXPENDITURES 

Purpose of Summarizing Records 

Where an attempt is made to keep costs for the purpose 
of ascertaining selHng prices which will net a reasonable profit, 
the cost sheets should record true facts as nearly as it is pos- 
sible to obtain them. Often these records are supplemented 
by a comprehensive system of stock reports, but at that point 
the accuracy of the system breaks down. No provision is 
made for summarizing the various details so as to permit of 
an accounting proof of the mathematical accuracy of the de- 
tailed records. In other words, an elaborate system of reports 
dealing with factory routine is installed which is separate and 
distinct from the accounting records, there being no connecting 
link between the two sets of records. 

This link is provided by certain cost summarizing records 
which are used for the purpose of compiling material, labor, 
and overhead costs as a basis for making entries to the factory 
ledger controlling accounts. These entries are made in order 
to summarize, for the period, the following data: 

1. Factory expenditures. 

2. Transfers of material, labor, and overhead items be- 

tween departments. 

3. Credits to departments for work done. 

4. Miscellaneous adjusting entries. 

Each of these four different kinds of controlling entries 
needs its own summary records. Those relating to factory ex- 
penditures are discussed in this chapter, leaving for later con- 

242 



CHARGING FACTORY EXPENDITURES 243 

sideration the summaries covering transfers, credits, and mis- 
cellaneous adjusting entries. 

Cost Period 

Summarizing records are prepared at the end of the cost 
period, which is the unit of time covered by the review of fac- 
tory operations. In most plants the cost period is in agree- 
ment with the pay-roll period. For example, in the majority 
of cases wages are paid weekly, and for this reason the finan- 
cial year is often divided into thirteen periods of four weeks 
each. Where wages are paid once or twice monthly, the cal- 
endar month may constitute the cost period. Again, the 
year may be divided into twelve cost periods, regardless of the 
number of days in each month. When wages are paid weekly 
and there are twelve cost periods to the year, the common 
practice is for two four-week periods to be followed by a five- 
week period, and so on throughout the year. The calendar 
month is sometimes used as a cost period even though wages 
are paid weekly, and in this case the accrued wages must be 
taken into consideration at the end of each month. But to 
obviate the clerical work involved in calculating accrued sala- 
ries and wages, the cost period is usually in agreement with the 
pay-roll period. 

Charging Factory Expenditures 

The accounting recoi-ds on which charges are compiled 
for entry upon the controlling accounts, include the following : 

1. Purchase record 

2. Accounts payable voucher and voucher register 

3. Summary of material received 

4. Expense distribution record 

5. Pay-roll and pay-roll analysis 

In some cases the department charges for material may 
be obtained from either the purchase record or voucher regis- 



244 COMPILING AND SUMMARIZING COSTS 

ter, or from a distribution sheet if a more detailed analysis 
is made on such a record. In other cases the source of the 
material charges is a summary of material received. The de- 
partmental labor charges are in all cases obtained from a pay- 
roll record or analysis of the pay-roll. 

The departmental overhead charges are obtained from 
both the purchase record (or voucher register, if this be used 
instead of a purchase record) and the pay-roll or pay-roll 
analysis, and distributed to the expense distribution record or 
analysis sheet. 

Method of Handling Purchase Invoices 

Creditors' invoices for materials, supplies, and equipment 
are the source for the entries upon the purchase record. The 
invoices should be supported by the reports of material re- 
ceived, purchase requisitions, and purchase orders as a check 
against quantity, kind, and price of material ordered and re- 
ceived. When invoices are entered on the purchase record, it 
is customary to stamp thereon all or part of the information 
given in Form 49. The number of details included in the 



Invoice Number 

Date Material Received 

Material Received Report Number. 

Purchase Requisition Number 

Purchase Order Number 

Quantity O. K 

Price O.K 

Extensions O. K 

Approved 

Entry on Stock Records 

Entry on Purchase Record 



Form 49. Invoice Stamp, Covering Data for Purchase Record 
(Size, 3 X 3.) 



CHARGING FACTORY EXPENDITURES 245 

Stamp will, of course, be determined by the needs of the case. 
The persons responsible for filling in the details should sign 
their initials to show that they have taken care of the matter. 
After the invoices have been properly stamped and found to 
be correct, they are ready for entry in the purchase record. 

Purchase Record 

The purchase record (also termed "Invoice Book," "Pur- 
chase Journal," "Invoice Journal," and "Purchase Analysis"), 
gathers and classifies the material charges and certain items 
of expense. Its columns provide for recording the date, in 
some instances the number of the invoice, the name of the 
creditor, and the posting references. The money columns 
show the total amount of the invoices and the distribution of 
the items to the material, expense, and equipment accounts 
affected. Additional columns often describe the articles pur- 
chased and give information as to terms of payment. As, 
however, every entry should be supported by an invoice or 
voucher of some kind, it should not be necessary to write all 
details in a summary record of this character. Form 50 illus- 
trates a simple form of purchase record. 

Posting from Purchase Record 

In posting from the purchase record, the total of all the 
invoices is credited to the Accounts Payable controlling ac- 
count, if this account is kept, while the amounts entered in the 
total column are credited to the various creditors' accounts in 
detail. The totals of the distribution columns with the excep- 
tion of that devoted to miscellaneous items, should be debited 
to the accounts affected, while the items entered in the mis- 
cellaneous column should be posted in detail to the debit of 
each account named therein. When separate general and fac- 
tory ledgers are used, care must be exercised to see that the 
proper control is established between the two ledgers. 



246 



COMPILING AND SUMMARIZING COSTS 







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CHARGING FACTORY EXPENDITURES 



247 



Accounts Payable Voucher 

Instead of the purchase record described above, invoices 
may be entered in a voucher register, thus eHminating the 

creditors ledger. Under these circumstances, an accounts pay- 
able voucher form is often used for the purpose of listing and 
classifying the invoices received during a definite period from 
one particular creditor. (See Form 51.) 

Voucher forms are numbered in advance and each form 
provides for recording the dates of the voucher and invoices, 
the name of the creditor, the date of payment, check number 
or cash book reference number, the signatures of the person 
who prepares the voucher and the executive who approves it. 
As the primary function of a voucher is to analyze the invoice 
charge, the names or symbols of the accounts which may be 





Date 1 

OF 

Invoice 


P.^RTICULARS 


Amounts 



































































































Audited: Approved for Payment 





Form 51. (a) Accounts Payable Voucher (inside). (Size, 9 x 8.) 



248 



COMPILING AND SUMMARIZING COSTS 



afifected are often printed upon the back of the form. While 
this practice saves time, a better plan is to refer to a Hst of 
accounts and symbol numbers when distributing the invoice 
expenditures. When the account classification runs into hun- 
dreds or even thousands, it is obviously impracticable to print 
their names upon the voucher form. 

Minor details worth noting in connection with the opera- 
tion of voucher forms are, that the certification as to the cor- 
rectness of the invoice may be stamped upon the voucher in- 
stead of the invoice, that spaces for recording the information 



ACCOUNTS PAYABLE VOUCHER 

Favor of No 

Address Date 




General Ledger Accounts 1 


Factory Ledger Accounts 


Account No. 


\^ 


Amount | 


Account No. 


^ 


Amount | 















































































Total 




Total 


























Date Paid Check No 


Voucher Register F 


Intry 









Form 51. (b) Accovints Payable Voucher (outside). (Size, 8 x 9.) 



CHARGING FACTORY EXPENDITURES 249 

as to the terms of payment may also be provided, and that the 
purchase requisition, purchase order, and material received re- 
port may be attached to the voucher instead of to the invoice. 
In fact, sometimes the canceled check in payment of the 
voucher is also attached, or the check may form part of the 
voucher. Where this is done the term "voucher check" is 
used. 

It will be seen that the voucher gives a complete his- 
tory of the transactions covered by the invoice, and also pro- 
vides for a uniform method of filing creditors' invoices. The 
forms should all be of the same size (about 8x9 inches), 
so that the records when folded will be of convenient size for 
filing. 

The question sometimes arises as to whether a separate 
voucher should be made out for each invoice, or whether all 
invoices received from one creditor should be grouped upon 
one voucher. It depends upon the method of payment. If 
creditors' accounts are paid monthly, all invoices from the 
same creditor should be grouped and entered together. If in- 
voices are paid separately, it would obviously be impracticable 
to postpone the preparation of the voucher until the end of the 
month. Moreover, the postponement of the work would, in 
many cases, delay the preparation of the summary records and 
statements. 

Under some conditions of manufacture the pay-roll record 
may be attached to the accounts payable voucher form. If the 
pay-roll is in book form, either bound or loose-leaf, reference 
may be made upon the voucher to the pages or sheet numbers 
of the pay-rolls and only the analysis need then appear upon 
the voucher. This eliminates the attaching of numerous 
records to the voucher, as pay-roll records are often bulky. 

In small manufacturing plants it is often practicable to 
have all charges to factory and expense accounts, as well as 
many of the charges to the asset accounts, appear upon this 



250 



COMPILING AND SUMMARIZING COSTS 



one record. In other words, no charges to expense of any 
nature or to the factory accounts are entered on the credit side 
of the cash book for posting to the debit of the various ac- 
counts affected. All expenditure items are vouched for entry 
in the voucher register. 

Accounts payable vouchers may be prepared even though 
a voucher register is not used in connection with these docu- 
ments, and entered in any kind of a purchase record. 

Voucher Register 

The voucher register (also termed "Register of Accounts 
Payable," "Accounts Payable Register," and "Record of 
Audited Vouchers") is used to summarize and analyze credi- 
tors' invoices. (See Form 52.) Though vouchers are usu- 
ally used in connection with this register, invoices may be used 
without preparing separate accounts payable vouchers. 

The voucher register differs from the purchase record in 
that it provides additional columns for recording information 
as to the payment of the invoices. It is a combination of the 
purchase record and purchase ledger, eliminating the necessity 
for keeping detailed creditors' accounts. To simplify the dis- 
cussion of this register, it may be divided into three sections : 

1. The descriptive section, giving the date, voucher or 

invoice number, name of creditor, amount, and in 
some cases the terms of payment and a description 
of the goods. 

2. The payment section, showing the amount and date 

of payment, check number, and the name of bank 
or cash book folio reference. 
'3. The distribution section, showing the charges to the 
accounts, columns being headed with the names 
of those account items which occur frequently dur- 
ing the month. Miscellaneous charges of rare 
occurrence are entered in a miscellaneous column. 



CHARGING FACTORY EXPENDITURES 251 

Posting from Voucher Register 

Postings from the voucher register are made as follows : 
The total of the total vouchers payable column is credited to 
the controlling Accounts Payable account. The totals of the 
distribution columns, with the exception of the miscellaneous 
column, are debited to the various accounts affected. The 
sundry items are debited to the account mentioned in each case. 

Where separate factory and general ledgers are kept, care 
must be taken to maintain the proper control between the two. 
The totals of the factory ledger account columns should be 
posted to the controlling factory account in the general ledger 
if the general ledger controls the factory ledger entries. 

Advantages and Disadvantages of Voucher Register 

The use of the voucher register has its advantages and its 
disadvantages. An objection sometimes raised is that, as no 
creditors' accounts are kept therein, information as to the total 
amount of purchases from any one creditor cannot be readily 
obtained. This objection is overcome by keeping a proper in- 
dex, say on 3 X 5 filing cards, of the names of the creditors, 
filed alphabetically; on each card would also appear the num- 
bers and dates of creditors' vouchers, recorded when the 
vouchers are entered in the register. The amount of business 
done with any creditor during a particular period of time, 
though not always vital information, is required by many busi- 
ness men for their personal satisfaction and may also be useful 
at times for the purpose of obtaining rebates, refunds, com- 
missions, special allowances, revised prices on future contracts, 
and so on. Where this information is essential, the purchase 
ledger provides it in more convenient form than the voucher 
register. On the other hand, when the total amount of busi- 
ness is required by kinds of merchandise purchased, the 
voucher register answers the purpose equally as well, since in 
both cases references must be made to the invoices. 



252 



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Another objection against the voucher register is that it 
does not provide for information as to allowances or adjust- 
ments after the invoices have been entered. This is met by 
the fact that journal entries showing invoice adjustments may 
be entered in the payment columns. Where, however, numer- 
ous adjusting entries have to be made to certain accounts, it is 
more convenient to keep purchase ledger accounts with such 
creditors. As a general rule, in most industries from 75% to 
95% of creditors' accounts are paid as per invoice amounts 
without dispute, and therefore the number of the accounts re- 
quiring adjustment is usually small. 

A final objection to the use of the voucher register is 
found in cases where partial payments or payments on account 
are made. Under these circumstances it is often more prac- 
ticable to keep a separate purchase record and ledger, unless 
the accounts settled by partial payments form a small portion 
of the total number, in which case they may be handled as sug- 
gested below. 

Combination Voucher Register and Purchase Record 

A voucher register may be designed with two total col- 
umns, one headed "Voucher Register Items" and the other 
"Purchase Ledger Items." Those items for which it is neces- 
sary to keep detailed creditors' accounts may be entered in the 
purchase ledger column and the rest in the voucher register 
column. This method saves time by eliminating many of the 
postings to creditors' accounts. 

Distribution or Analysis Record 

The classifications of the general and the factory ledger 
accounts are usually so elaborate in manufacturing businesses 
where a complete cost system is installed, that adequate colum- 
nar provision can rarely be made in the purchase record or 
voucher register for a complete analysis of the various expen- 



CHARGING FACTORY EXPENDITURES 255 

ditures. If the necessary number of columns were provided to 
take care of this elaborate analysis, the width of the sheets 
would make the record so cumbersome and bulky as to be im- 
practicable for everyday use. Therefore, a supplementary 
record is often necessary for the purpose of classifying the 
items of expenditures so that postings may be more readily 
made to the accounts affected. 

This supplementary record is known as an "Analysis 
Record," ^'Distribution Record," or "Summary Record." (See 
Form 53.) Its purpose is to support the purchase record or 
voucher register and permit the proving of the columns of the 
latter before any postings are made to the ledger. Separate 
records or sheets may be kept for the analysis of the material 
charges, overhead expense items, selling expenses, and admin- 
istrative expenses. Also, if it is necessary to analyze the 
various expenses affecting different departments, a separate 
record may be kept for each department. 

However, even this method may become cumbersome, due 
to the number of books or the number of columns necessary to 
compile the information. If such is the case, the analysis may 
be made by means of a number of accounts kept on separate 
cards or sheets, headed with the names of the expenses. The 
details as to the date of the item posted, reference number, and 
amount may be entered in the spaces provided for recording 
this information for each period. In some instances it may 
be necessary to give a description of each item as well as names 
and quantities, in which case the distribution record should 
provide for recording this information. When such a dis- 
tribution record is kept, the totals of the detailed items are 
proved with the totals of the various columns in the purchase 
record or voucher register, this proof being prepared by means 
of an adding machine. 

There are various forms of distribution record, all similar 
in character to Form 53. The name of the account and the 



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CHARGING FACTORY EXPENDITURES 257 

symbol appear at the top of the sheet, and the columns are 
headed with the months of the year or the definite cost periods. 
A reference column and an amount column are also provided 
for summarizing the items affecting the account named in the 
heading. At the end of the month, after the figures have been 
proved with those of the purchase record or voucher register, 
postings may be made directly to the ledger accounts. When 
a proof is made by means of a listing adding machine, it is 
well to use this list as a guide to, or a check on, the postings 
to the ledger accounts. 

Form 53 may be developed to provide spaces for a de- 
scription of the items or for inserting quantities, or any number 
of changes may be made without destroying the original idea. 
The sheets should be bound in a loose-leaf binder and classified 
by account, name, and number in appropriate sections of the 
binder. Thus, one section may be devoted to material ac- 
counts, another to factory expenses, a third to selling expenses, 
a fourth to administrative expenses, another to miscellaneous 
charges, and others to factory departments — the number of 
sections being governed by the various columns in the pur- 
chase record or voucher register. 

Summary of Material Received 

In some cases purchases of material can conveniently be 
posted to the various stock records affected directly from the 
invoices or vouchers, supported by the reports of material re- 
ceived. In other cases it is more practicable to summarize the 
material received and prove this summary with the figures 
shown by the purchase record or voucher register, together 
with their supporting documents. Such a summary, known 
as a "Summary of Material Received," "Report of Material 
Received," or "Summary of Incoming Materials and Sup- 
plies," is prepared from the detailed reports of material re- 
ceived, and if monetary values are necessary, the information 



258 



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is obtained from invoices. This record is used where it is 
necessary to summarize information so as to facilitate postings 
to the detailed stock records. 

The summary of material received (Form 54) is headed 
with its date and number. The columns show the numbers of 
the material reports and amounts to be charged to the various 
accounts, a total column being also provided as a check on 
the accuracy of the distributed figures entered in the various 
columns. It may occasionally be necessary to give details as 
to the names of creditors and a description of the articles pur- 
chased, but this information will rarely be needed, as it is 
given in the detailed reports of material received. 

A summary of material received may also be used as an 
intermediate record for the purpose of compiling the material 
charges to definite jobs, orders, or articles. 

A specialized form of summary of material received is 
the so-called "Tally Sheet" used in wood-working plants. 
Such a sheet shows the quantities of the various grades and 
kinds of lumber received, and thus serves as a check on the 
invoices. Other special forms for showing the receipt of in- 
coming materials of dijfferent kinds are frequently met with, 
and all of them may be considered as summaries of material 
received. 

Pay-RoU 

An analysis of the pay-roll is required for the purpose 
of compiling the totals of the labor charges to be posted to the 
ledger accounts affected. In small manufacturing plants the 
analysis may be made on the pay-roll when the time and labor 
reports are entered thereon. Where two records are used, the 
pay-roll may be prepared from the time reports, and the pay- 
roll analysis from the labor reports, in which case one should 
check the other. 

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CHARGING FACTORY EXPENDITURES 261 

wages of employees, the record may be simple in character, 
showing the employees' numbers, names, and amount of wages 
for the pay-roll period. The details as to hours of work and 
production would then appear on the time reports of each in- 
dividual employee. An elaboration of this record shows the 
daily time and wages posted in separate columns at the end 
of each day. On a record kept in this way, the total time of 
each employee would be ascertained and entered in a total col- 
umn at the end of the pay-roll period. The day or hourly rate 
would be shown in a separate column, and after multiplying 
the total time by this rate, the total amount of wages would 
be ascertained and entered in a total wages column. 

Columns may also be provided for deductions for tools, 
supplies, advances, or other miscellaneous items which are 
charged employees, such as fines on account of their work, and 
so on. The use of such columns necessitates an additional 
column to show the net amount paid to each employee. 

Form 55 is a pay-roll record which may be prepared daily 
from time reports in the way suggested above. 

Where departments are many and employees numerous, 
separate pay-roll records are usually prepared for each depart- 
ment of the plant, and in some cases the pay day is not the 
same for all departments, it being more convenient to spread 
the work of preparing the pay-roll and paying the employees 
over the week or month. The use of separate departmental 
pay-roll records often constitutes in itself an analysis, no addi- 
tional records being required. 

Pay-Roil Analysis 

A pay-roll analysis (Form 56) is prepared to ascertain 
the total wages of each department and also the amount of 
productive labor as separate and distinct from non-productive 
labor, preparatory to charging these various totals to their 
proper accounts. Therefore, an analysis of the pay-roll is 
made to show ; 



262 COMPILING AND SUMMARIZING COSTS 

1. The productive labor chargeable to each department. 

2. The detailed items composing the non-productive 

labor. 

3. The distribution of the items of non-productive labor 

to departments. 

Complex conditions in large plants often make it impos- 
sible to combine the pay-roll analysis with the pay-roll, as a 
complex analysis may delay the work and thus interfere with 
the paying of employees. For this reason the analysis is often 
prepared after the pay day. 

In a small plant the pay-roll analysis may be made on the 
ordinary columnar sheets, bound or in loose-leaf form. But 
where departments are numerous and the analysis of the pay- 
roll in consequence is elaborate, columnar sheets are too cum- 
bersome to be satisfactor}\ In such a case, the analysis may 
be made on as many sheets as there are labor accounts, in the 
same manner as an analysis of purchases is made on the dis- 
tribution records described in this chapter. In fact, the pay- 
roll analysis may form a part of the distribution record and be 
kept in a separate section of that record. It should then be 
balanced and proved with the pay-roll before postings are 
made to the ledger accounts. 

As already mentioned, the pay-roll totals may be entered 
on the voucher register, being supported by an accounts pay- 
able voucher. If this method is used, the detailed items would 
still have to be distributed so as to compile the charges to the 
ledger accounts. When employees are numerous this analysis 
is elaborate, and in that case it would be preferable to make it 
separately in the distribution record. This procedure, how- 
ever, is not always necessary, in which case the postings to the 
accounts affected may be made directly from the voucher 
register. 

Where a separate pay-roll analysis is prepared, the post- 
ings to the ledger would be as follows : The figures of the total 



CHARGING FACTORY EXPElsDITURES 



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column are credited to a Pay-Roll account on the general led- 
ger, while the totals of the distribution columns are debited 
to the departmental productive labor accounts and indirect ex- 
pense accounts affected. If a separate distribution record is 
kept for each account, the postings are made in the same way 
excepting, of course, that the figures are taken from several 
sheets instead of a single sheet. 

Form 56 represents a pay-roll analysis prepared from 
labor reports at the end of each pay-roll period. 

Where wages are paid weekly, the pay-roll analysis at the 
end of each week should check with the pay-roll. If the cost 
period is based on the calendar month, the accrued wages at 
the end of the month should be added to the totals for the 
several weeks so that the charges posted to the ledger accounts 
may include the wages for the entire month. 

If both the cost and pay periods are on a monthly basis, 
no accrued wages need be taken into account when the analy- 
sis is prepared at the end of each month. The work may 
then be simplified by doing part of it daily or weekly as the 
labor reports are received from departments, so that when 
the end of the month arrives, there is no big accumulation of 
reports. This plan of analyzing labor reports at the end of 
the cost period might have its advantages in a small plant, 
but if permitted in a large one, the presentation of the financial 
and factory statements at the end of each cost period might 
be delayed. 

Analysis of Charges to Jobs 

Another function of a pay-roll analysis is to show the 
charges to the various jobs and articles manufactured, thus 
summarizing the charges to cost sheets and cost records as 
well as serving the purpose of an accounting summar}'' record. 
When this procedure is followed, the labor reports, instead of 
being posted directly to the cost sheets, are entered upon the 



CHARGING FACTORY EXPENDITURES 265 

pay-roll summary. This provides a proof of the correctness 
of the total amount of labor charged to jobs, orders, or articles, 
as this total should equal the total productive labor. 

Process Pay-Roil Summary 

Under the process method of cost-finding, the labor 
charges are often analyzed upon a pay-roll summary for the 
purpose of ascertaining the labor charges to the various proc- 
esses, the entry being made in total at the end of a cost period 
to a process cost record or account. This method eliminates 
the posting of details directly to the process cost record and 
furnishes a proof of the correctness of the labor charges. 

Summary of Salaries 

So far, the discussion has dealt with the productive and 
non-productive wages of factory employees. The salaries 
paid to the superintendent, foremen, and other supervfsors are 
often entered on a separate pay-roll record, usually because this 
information is confidential. This record is so simple in char- 
acter that the analysis of the charges to departments can be 
readily ascertained. Salaries paid to ofiice employees should 
also be kept in a separate pay-roll record, as these must be 
apportioned over the selling and administrative expense ac- 
counts and the factory overhead accounts. To sum up, the 
pay-roll may be analyzed in three sections : ( i ) productive 
and non-productive wages; (2) salaries of superintendents, 
foremen, and supervisors; and (3) salaries of the clerks em- 
ployed in the selling, administrative, and factory departments. 



CHAPTER XVII 

COST SUMMARIZING RECORDS— TRANSFERS 
WITHIN THE FACTORY 

Kinds of Records 

In every cost system the movement of material and the 
transfer of labor between departments must be summarized on 
suitable records, and to accomplish this some or all of the 
records listed below serve a necessary purpose : 

1. Summary of material requisitions. 

2. Summary of departmental material used. 

3. Summary of stock transfers. 

4. Summary of departmental transfers of material. 

5. Summary of departmental transfers of labor. 

6. Summary of shop order costs. 

7. Summary of defective work costs. 

8. Summary of factory overhead distribution. 

9. Summary of production. 

Summary of Material Requisitions 

Material requisitions should be summarized to determine 
the amounts to be credited to the controlling material and sup- 
plies accounts, and charged to various departmental material 
and expense accounts. These charges include direct material 
and miscellaneous supplies chargeable to factory overhead. 
Any miscellaneous supplies applicable to the selling and admin- 
istrative departments should also be shown on the summary. 

Where the classification of general and factory accounts 
is not extensive, a summary of material requisitions may be 
made upon a columnar-ruled sheet, as in Form 57. Requisi- 
tions may be entered on the summary in detail or in daily totals 

266 



TRANSFERS WITHIN THE FACTORY 



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268 COMPILING AND SUMMARIZING COSTS 

obtained on an adding niacliine. The distribution to the 
accounts should be proved with the amount in the total column. 

The summary is usually prepared after the material requi- 
sitions have been priced and entered upon the stock records and 
before postings are made to cost sheets, though the work may 
be done after postings are made to the cost sheets and other 
cost records. Requisitions should then be checked to see that 
none are missing. In some instances it may be necessary to 
have separate summary columns for credit and charge trans- 
actions, especially if there are several stock- rooms, when a 
separate credit will have to be passed to each stock-room ac- 
count for the material requisitioned therefrom. Or it may be 
more practicable to provide separate sheets for credit trans- 
actions afifecting stock-room accounts and charge transactions 
affecting departmental material and expense accounts. 

Where the classification of the accounts is elaborate, a 
summary of material requisitions may be prepared upon the 
distribution sheet (Form 53) already described. A separate 
sheet w^ould then be used for each account affected both as to 
credit and charge transactions, the detailed items or the daily 
totals being entered upon these sheets. The totals should be 
proved each day and the sum totals ascertained at the end of 
the cost period. These should be posted to the credit of the 
stock-room controlling accounts in the factory or general 
ledger and to the debit of the departmental material and ex- 
pense accounts. If separate factory and general ledgers are 
kept, care must be exercised to see that the proper control is 
established for the transactions w^hich affect each ledger. 

All material withdrawn from stock is not necessarily 
applicable to a definite job, order, or article. Some of it may 
be stored in the operating department to be used in small quan- 
tities as required. Therefore, when summarizing the material 
withdrawals from stores, it may be necessary to differentiate 
between material charges applicable to definite jobs or orders, 



TRANSFERS WITHIN THE FACTORY 269 

and material which is being stored in a sub-stock-room or 
operating department. Under some conditions the material 
requisitioned for each job is summarized upon separate sheets 
or cards before an entry is made upon the cost sheet. Where 
numerous small parts are used in the manufacture of large 
articles and the requisitions show quantities only, these are 
first summarized and then priced at their average cost before 
the cost sheet entry is made. 

Summary of Departmental Material Used 

The summary of departmental material used is similar to 
the summary of material requisitions, and the same form may 
be employed. The consumption of material stored in operat- 
ing departments is recorded on departmental reports showing 
its application to jobs. These reports are summarized to ascer- 
tain the totals to be credited to departmental material-stock ac- 
counts and charged to departmental work-in-proccess accounts. 

Summaries of Material Transfers 

Where several storerooms are operated, portions of the 
material are often transferred from one storeroom to another. 
If such transfers are not recorded upon the regular detailed 
material requisitions and in that way entered upon the sum- 
mary of material requisitions, provision must be made for 
summarizing them on a separate record. This would take the 
form of a summary of material requisitions, the totals being 
credited and charged to the stock-room accounts affected. 

In the same way, if transfers of material from one oper- 
ating department to another are numerous, they should be sepa- 
rately recorded on a summary the totals of which are charged 
or credited to departments receiving or transferring material. 

Summary of Departmental Transfers of Labor 

Employees may be transferred temporarily from one de- 
partment to another when orders are rushed or a department is 



270 



COMPILING AND SUMMARIZING COSTS 



short-handed. These transfers should be recorded upon 
detailed labor transfer reports and provision made for sum- 
marizing the reports so tha the totals may be credited and 
charged to the proper departmental labor accounts. Such a 
summary can be readily prepared on a columnar sheet such as 
the one used in summarizing material requisitions (Form 57). 
The summary should, of course, include only changes of 
a temporary character. Any permanent transfers should be 
shown on all necessary records, the employee's number and the 
position of his name upon the pay-roll being changed. 

Summary of Shop Order Costs 

Shop order costs for repairs and maintenance should be 
summarized separately from production costs for the reason 
that they arc an overhead charge to departments. Such sum- 
maries are usually prepared from the cost sheets of repair jobs 
on a standard columnar sheet. If separate costs are not kept 
for each repair order, the summary may be prepared from 
standing orders — in either case showing the total material, 
labor, and overhead charges to overhead accounts and the 
credits to departmental work-in-process accounts of depart- 
ments. In small plants a summary of shop order costs may be 
prepared directly from the detailed material and labor reports 
instead of from the cost sheets, provision being made for over- 
head. 

Form 58 is used to summarize shop order costs. Each 
shop order should be entered separately after the costs are as- 
certained, although where the orders for repairs are numerous, 
it may be more convenient to enter daily totals obtained by 
means of an adding machine. The form shows the total mate- 
rial, labor, and overhead costs to be credited to the depart- 
ments which work upon the orders. If the repairs are all 
made in one mechanical or millwright department, this depart- 
ment would receive the entire credit for all work done. The 



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charges to the repair and maintenance accounts should be 
proved with the total credits. The postings from this record 
are made to the ledger accounts shown in the headings. 

In small plants it may not be necessary to enter the mate- 
rial, labor, and overhead costs separately, in which case one 
column only is required for ascertaining the credits. In large 
plants a separate form may be used for each department, such 
as the distribution sheets described in the previous chapter. 

Summary of Defective Work Costs 

A valuable administrative record to present to the man- 
agement is a summary of costs of defective work, prepared 
from the cost sheets of this class of production, the totals of 
\vhich are credited to the department doing the work. Col- 
umns provide for charges to the various stock or expense ac- 
counts, depending upon the disposition of the defective work. 
Such a record is handled practically in the same manner as the 
summary of shop order costs, and may be combined with this 
summary or that of production, or may be made out separately. 

Summary of Factory Overhead Distribution 

The department overhead items are obtained from the fol- 
lowing cost summaries, already described : ( i ) purchase rec- 
ords or voucher register, supplemented, when necessary, with 
analysis sheets; (2) pay-roll or pay-roll analysis; (3) sum- 
maries of material requisitions and transfers; (4) summary of 
departmental transfers of labor; (5) summary of defective 
work costs; (6) summary of shop order costs. 

After gathering the data upon the summaries so far de- 
scribed and posting the figures to the factory accounts, the 
next step is to prepare a summary of factory overhead distribu- 
tion for each department. The data for these summaries are 
taken from factory ledger accounts and distributed thus : 



TRANSFERS WITHIN THE FACTORY 



273 








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274 



COMPILING AND SUMMARIZING COSTS 



1. Items of overhead chargeable to non-productive de- 

partments are summarized and distributed. 

2. The overhead of each non-productive departmer^t is 

distributed to the productive departments. 

3. The items of overhead chargeable to the productive 

departments are summarized in order to charge 
the total to departmental work-in-process accounts. 

The overhead distribution summaries are usually prepared 
upon columnar- ruled sheets (Form 59). The items are placed 
at the left, the form is headed with the months or cost periods, 
and the totals are charged and credited to the accounts affected. 
Chapter XX discusses the posting of these items. 

Summary of Production 

Before designing a form for summarizing the information 
as to production, consideration must be given to the system in 



SUMMARY OF PRODUCTION 

Department 

For 19 

No 


Date 

OR 

Report 
No. 


Remarks 


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Summary of Costs 


Total 


Material 


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Form (>o. Summary of Production (Size, 8 x 11.) 



TRANSFERS WITHIN THE FACTORY 275 

use and to the method of crediting production. The product 
may be credited to the departmental work-in-process accounts 
and charged to the various stock accounts, after the work is 
completed, or as it is finished in one department and trans- 
ferred to another, to which it is charged. 

The summary of production (Form 60) is prepared from 
the production reports and cost sheets, entries being compiled 
daily or at the end of the month. If compiled daily, the 
monthly summary should be on a separate sheet. 

Another summary form may be used to record the charges 
to the stock accounts when production is credited to the work 
in process accounts, the form consisting of a columnar sheet 
headed with the names of the stock-room accounts to be 
charged. The total of all credits, as shown by the summary 
of production, must be in agreement with this additional rec- 
ord, thus proving the clerical accuracy of the work. 

Where there are many departmental work-in-process ac- 
counts or numerous stock-room accounts, a separate summary 
of production may be made, one for each account, the pro- 
cedure being the same as with the distribution records. 

In process cost-finding, a production summary for each 
or all classes of product is often prepared showing quantities 
only. Under these circumstances the quantities charged to 
stock should be proved before the costs are figured. The total 
costs entered upon each form are charged to a stock account, 
and the material, labor, and overhead costs are credited to de- 
partmental work-in-process accounts. The kind of product, 
the number of the operating departments, and the method of 
cost-finding determine the form of a production summary. 

A final point is that the cost of equipment or machinery 
made in the factory should not be included in the regular pro- 
duction. The credits to departmental accounts for this work 
should be entered upon a separate production summary, and 
the costs charged to suitable plant asset accounts. 



CHAPTER XVIII 

COST SUMMARIZING RECORDS— SALES, COST OF 
SALES, AND JOURNAL ENTRIES 

Kinds of Records 

Up to this point, consideration has been given to the 
reports covering the department charges for material, labor, 
and overhead, and the summaries covering the transfers within 
the factory. Provision must be made for crediting the factory 
with the product sold. The necessary steps in this connection 
entail : 

1. Recording and costing the sales. 

2. Preparing the sales summary and cost of sales sum- 

mary. 

3. Recording and costing returns. 

4. Preparing returns summary and cost of returns sum- 

mary. 

5. Crediting the costs chargeable to the administrative 

or selling departments. 

Shipping Records, Sales Records, and Costing Sales 

The shipment of the product after its sale may be covered 
by the shipping order, which record is often a carbon copy of 
the factory order. (See Form 61.) 

When it is necessary to issue more definite shipping in- 
structions, as for instance when part shipments are made, the 
back of the form may provide spaces for this information. 
The shipping record may also be combined with the billing and 
costing sales record. When this is done, the original copy or 
customer's invoice, and the second copy which may be the sales 
record, are usually held in the office until the merchandise is 

276 



SALES COSTS AND JOURNAL ENTRIES 



277 



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28o COMPILING AND SUMMARIZING COSTS 

reported shipped on the third copy. If part shipments are 
made, a note can be placed on the bottom of the invoice stat- 
ing that all items not extended are on back order and will be 
shipped at a later date. If the foregoing procedure is followed 
when the three copies are made, no items should be extended 
until the merchandise is shipped, and then only for those items. 
If any remain on back order, a new set of forms should be pre- 
pared to cover their shipment, the procedure being the same. 

In the handling of the sales record copy, provision may 
be made for entering thereon the cost of sales unless there is 
an objection to disclosing the profit. If so, a fourth copy 
may be prepared and marked "Cost of Sales Record," to be 
used in costing the items sold. 

The above method of combining shipping instructions 
with customer's invoice, sales record, and cost of sales record 
is illustrated in Form 62. 

Another method of handling confidential cost of sales in- 
formation is to use an extra detachable column, for recording 
the cost information upon the sales record. If the sheets are 
perforated between the sales and the cost of sales columns, the 
latter can be detached after the cost summaries are obtained 
and before the sales sheets are placed in a binder or filed in 
some other suitable way. 

Under some circumstances the costing of the sales cannot 
be combined with the billing and shipping operations, a case 
in point being where the quantities shipped are classified and 
summarized and the cost is obtained at the end of the period. 
When this is the practice, an ordinary columnar sheet headed 
with the names of the articles, or a separate sheet for each ar- 
ticle shipped, is used to summarize the quantity shipped as en- 
tered on the detailed sales records. Where quantities are 
compiled for the purpose of costing sales, the figures should 
always be proved. Unless this is done, the cost information 
and statements based thereon may be inaccurate. The infor- 



SALES COSTS AND JOURNAL ENTRIES 281 

mation as to cost of sales is, of course, obtained from either 
the cost sheets of special orders, or the stock records if these 
show cost values. Where standard products are carried in 
stock, the average costs may be taken directly from the stock 
records or cost sheets showing cost averages. 

In process cost-finding, if cost values are not entered on 
the finished stock records, provision should be made for cost- 
ing each lot or shipment. The cost of the same product manu- 
factured at different times would often vary. If the costs of 
the articles most recently manufactured are not used, or if no 
check is kept on the cost of each lot shipped, the average cost 
of the articles produced should be entered as the cost of sales. 
The finished stock records can generally be used for showing 
average costs, for the reason that in ascertaining average costs 
the inventories at the beginning and end of the period must be 
considered, as well as the production and shipments during 
previous periods. 

Sales Summary 

A sales summary (Form 63) usually takes the form of a 
loose-leaf columnar-ruled sheet unless the sales classifications 
are so numerous as not to permit the analysis appearing on one 
sheet. In this case the sheets would be headed with the names 
of the accounts to be credited, and the total amount of sales 
would be shown separately. The total of each classification 
should be credited to an appropriate sales account in the gen- 
eral ledger and the total sales posted to the Accounts Receivable 
controlling account; or one sales account may be kept in the 
general ledger, with a supporting record showing the analysis 
of sales by classes. Customers' invoices may be entered on 
the sales summary separately or in daily totals compiled by 
means of an adding machine. 

It should be understood that the use of these sales sum- 
mary records presupposes many kinds of product. Where the 



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SALES COSTS AND JOURNAL ENTRIES 283 

classification is simple, the totals to be credited to the various 
sales accounts can be ascertained from an ordinary sales book. 

Cost of Sales Summary 

The cost of sales summary is prepared in the same way 
as the sales summary, the procedure in classifying the product 
and ascertaining the totals to be charged to the cost of sales 
accounts being identical. The total amount should be credited 
to a finished stock account or Factory Ledger account as kep: 
in the general ledger. Under some conditions quantities only 
are compiled upon analysis sheets, and the cost of sales sum- 
mary is prepared as soon as costs are obtained. In either case 
the cost of sales summary takes the form of a columnar sheet 
or separate sheets, as the case requires. 

Return Credit Records 

When merchandise is returned by a customer and credit 
is sent to him, three copies of the credit memo (Form 64) are 
made out and used as follows : 

1. The original sent to the customer shows that credit 

has been allowed for the merchandise returned. 

2. The second copy is used for posting the credit and as 

a basis for ascertaining the total credits allowed 
customers. 

3. The third copy serves as a cost of returns record. 

Where special allowances are made to customers, credits 
must also be passed and reports prepared so that this informa- 
tion may be properly recorded. As these items are usually 
deductions from the sales prices and have nothing to do with 
costs, they should be separately recorded and not included as 
part of the returns record. This necessitates two credit 
records, one for merchandise returned showing both sales and 
cost values, the other an allowance or sales deduction record. 



284 



COMPILING AND SUMMARIZING COSTS 



(Onginat) ^j^ BROWN MANUFACTURING CO. 
New York, N. Y. 

CREDIT MEMORANDUM 

Credit C. M. No 

Address Date 








1 


Quantity 


Description 


Price 


Amount 





































{Duplicate) 



OFFICE RECORD COPY 
CREDIT MEMORANDUM 



Credit 

Address. 



C. M. No.. 
Date 



Quantity 



Description 



Price 



Amount 



Approved Charge Account No.. 

Summarized Charge Account No . 



Form 64. (a) Cost of Returns Record Combined with Customer's Credit 
Memo and Office Record Memo. (Size, 9 x 6.) 



SALES COSTS AND JOURNAL ENTRIES 285 



{^Triplicate) 

COST OF RETURNS RECORD 

Credit C. M. No 

Address Date 








1 


Quantity 


Description 


Cost 


Total 





























































Summarized Credit Account No 


Credit Account No 


Stock Recoi 


"d Entry Charge Ac 


count ^ 
count N 







Charge Ac 










Form 64. (b) Cost of Return Records Combined with Customer's Credit 
Memo and Office Record Copy. — Continued. 

Returns Summary and Cost of Returns Summary 

The returns summaries — one for the amount of the re- 
turns allowed customers and one for the cost of these returns 
— are prepared in the same way as the summaries of sales and 
cost of sales. They may take the form of a columnar sheet 
for all classifications or a separate sheet for each class of prod- 
uct, as already described. By means of these summaries the 
total of all returns is credited to the customers' controlling re- 
turns accounts, and the detailed totals are charged to the sales 
accounts which have been credited with tlie merchandise 
shipped. The cost of the returns is charged to the finished 
stock accounts, or factory ledger account, total credits being 
passed to the proper cost of sales account. Allowances are 
charged to an allowance account if it is not possible to analyze 
and deduct them from the proper sales account. 



286 COMPILING AND SUMMARIZING COSTS 

Costs and Sales 

When it is possible to combine the sales and cost records, 
includinj<; the summaries, this may be done. Such a combined 
record (Form 65), known as an "Analysis of Sales and Costs" 
or ''Register of Sales and Costs," may be ruled to meet the 
requirements of each concern, but should provide columns 
for showing the invoice number, name of customer, amount of 
sale, cost of sale, and the analysis of the sales and costs by 
product classifications. If invoices are so numerous as to re- 
quire entry in daily totals, the invoice number and name of 
customer columns would be eliminated. 

An advantage of this record is that it shows the sales and 
costs in parallel columns, and therefore it guards against the 
error of crediting the sales to one account and charging the 
costs to a different product classification account. When the 
sales summary is prepared separately from the cost of sales 
summary, and no check is installed to see that the classification 
both as to sales and costs is in agreement, it may be found 
that sales are classified in one way and costs in another. Such 
errors would result in sales appearing as part of the totals 
against which no costs are charged, or costs may appear for 
some product classification against which no sales are credited. 
Therefore, whenever the sales and cost of sales summaries are 
prepared separately, a comparison should be made of the orig- 
inal records to see that the name or symbol of the account to be 
credited or charged is alike for both the sales record and cost 
of sales record. When detailed analyses are made on exten- 
sive forms, errors are apt to occur by inserting items in wrong 
columns. 

Besides receiving credit for the cost of sales, the factory 
should be credited for the cost of all work which it does for 
the benefit of the administrative and selling departments. For 
example, repairs in these departments or miscellaneous supplies 
of stationery kept in one stock-room for all business require- 



SALES COSTS AND JOURNAL ENTRIES 



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288 COMPILING AND SUMMARIZING COSTS 

ments and withdrawn by thc?c departments, should be credited 
to the factory stock-room accounts and charged to the proper 
selHng and administrative expense accounts. These credits 
for costs and miscellaneous supplies would be obtained from 
the summaries previously described, such as production re- 
ports and the summary of material requisitions. 

Journal Entries 

To avoid rewriting a long series of journal entries at the 
end of each cost period, postings should be made directly from 
summaries, and, except in rare cases, it should not be neces- 
sary to journalize the totals for postings to factory and general 
ledger accounts. Entries adjusting discrepancies and items of 
an extraordinary character should, however, be journalized in 
the usual way. For this purpose, a two-column factory jour- 
nal may be used and kept distinct from the general journal ; or 
factory ledger columns may be inserted in the general journal 
for the purpose of recording the information which affects the 
factory ledger accounts. This is the ordinary type of book- 
keeping record and as such requires no further description. 

Journal Vouchers and Standing Journal Entries 

Instead of a bound book, a journal voucher (Form 66) 
is sometimes used for the purpose of recording the summaries 
and adjusting entries. One advantage of this loose-leaf 
method lies in the fact that journal entries may then be made 
either in the general office or factory cost office, and after the 
information is posted to the proper accounts the vouchers can 
be filed in a loose-leaf binder. 

Still another method of handling closing entries is by 
means of a sheet on which the "Standing Journal Entries," as 
they are called, are covered for the year. In factory cost 
accounting, much the same entries are made and the same ac- 
counts are affected from period to period, the debits and credits 



SALES COSTS AND JOURNAL ENTRIES 



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292 COMPILING AND SUMMARIZING COSTS 

varying only as to amounts. Therefore, a standing journal 
entry sheet may be used, as shown in Form 67. At the ex- 
treme left the names of the accounts or account numbers to be 
debited or credited appear, and the columns are headed with 
the months of the year for the purpose of inserting the totals 
for each cost period. Provision is also made for a posting 
check. 

Besides eliminating the necessity for rewriting the names 
of the accounts, these standing journal entry forms have other 
advantages. When all summaries are journalized, the form 
provides a means of knowing that every entry for the period 
has been covered. Also, as a comparison of the current trans- 
actions with those of the previous months can readily be made, 
any large discrepancies may be noted before posting to the 
accounts. Finally, the standing journal form is a valuable aid 
to the preparation of factory statements, as all the information 
is arranged in columnar form for each period. Totals can thus 
be readily obtained or the figures of one period can be com- 
pared with those of another. 

Chart of Cost Summarizing Records 

Form 68 shows in concrete form the cost summarizing 
records described in this and the preceding chapters. It should 
be noted that the distribution record, which was discussed in 
Chapter XVI, may be used for all summary purposes. The 
sheets of each summary may be classified in sections in a loose- 
leaf binder, each section being kept separate by means of tab 
indexes, thus providing a means for ready reference. The 
folios of each section should be numbered for posting purposes. 



Part IV — Controlling the Cost Records 



CHAPTER XIX 

GENERAL LEDGER CONTROL OF FACTORY 
ACCOUNTS 

The Control of Cost Records 

Cost records are controlled by the financial accounts in 
two ways: Postings are made from the cost summarizing 
forms described in the preceding chapters, ( i ) to the general 
ledger or (2) to factory accounts in a subsidiary factory ledger 
as well as to certain of the controlHng accounts in the general 
ledger. The different methods of control are explained in 
this and the following chapter. 

To illustrate the general method of controlling the cost 
records by means of the general accounting records, the fol- 
lowing balance sheet is presented as a starting point. It is 
assumed that the books of the Brown Manufacturing Com- 
pany show the following financial condition at January i, 
1918: 

The Brown Manufacturing Company 
Balance Sheet, January i, 1918 



Assets 

Cash $ 38,000.00 

Accounts Receivable. 174,000.00 

Notes Receivable 20,000.00 

Merchandise Inven- 
tory 226,700.00 

Machinery and Fix- 
tures 35,000.00 



Total Assets $493,700.00 



Liabilities 

Xotes Payable $ 25,000.00 

Accounts Payable . . . 64,000.00 



Total Liabilities $ 89,000.00 

Capital Stock 350,000.00 

Surplus 54,700.00 



Total Liabilities and- 



Capital • $493.700-00 



293 



294 



CONTROLLING THE COST RECORDS 



Such a balance sheet may l)e prepared from the general 
ledger or private ledger accounts at the end of a fiscal period. 
The above accounts shov^r the condition as to assets, liabilities, 
and capital and all appear in the general ledger. 

Income and Expense Accounts 

Accounts must also be provided to show the details of in- 
come and expenses, and would include the following: 

1. Sales 

2. Merchandise Purchases 

3. Productive Labor 

4. Factory Indirect Expenses 

5. Selling Expenses 

6. Administrative Expenses 

In order to simplify the discussion, and as the procedure 
would be the same regardless of the number of accounts, it 
is assumed that only one account is kept with each of the 
items listed above. In actual practice, however, there might 
be several sales accounts to show the amount of sales of the 
different kinds of product, several accounts showing the dif- 
ferent kinds of purchases, the productive labor might not all 
be recorded in one account, and there would be detailed ac- 
counts to record the factory indirect expenses, selling ex- 
penses, and administrative expenses. 

Assuming the correctness of the foregoing balance sheet 
on January i, 1918, the first entries, indicated by the figure ( i ) 
in the illustrative accounts appearing on pages 296-298, are 
those made to record the balances upon the ledger accounts. 

Purchase Transactions 

The purchases are entered from the invoices or from the 
accounts payable vouchers to a purchase record or voucher 
register. Assume that at the end of the cost period this record 
shows total purchases of $65,000, represented by: 



GENERAL LEDGER CONTROL 



295 



Purchases of Material $59,000.00 

Invoices chargeable to Indirect Expense Accounts 2,500.00 

Invoices chargeable to Selling Expense 1,500.00 

Invoices chargeable to Administrative Expense 2,000.00 

These items would be posted to the various accounts affected, 
constituting entries (2) in the illustrative accounts which follow. 

Pay-Roil and Analysis 

Information as to salaries and wages paid would be ob- 
tained either from the cash record supported by the pay-roll 
analysis, or from the voucher register if the pay-roll were 
entered in that record. In the case under consideration, the 
pay days are assumed to be on the fifteenth and at the end 
of the month, and the pay-roll analysis shows that salaries 
and wages amount to $28,300, made up as follows : 

Productive Labor $18,000.00 

Non-Productive Labor, including supervision 4,500.00 

Salesmen's Salaries 4,300.00 

Administrative Office Salaries 1,500.00 

The postings of pay-roll items to their respective accounts 
constitute entries (3) and represent the current charges for 
labor and various items of overhead. Thus the postings 
obtained from the summaries or analyses of the purchases and 
the analysis of the pay-roll represent the current factory 
expenditures. 

Sales Transactions 

Assuming that the total shipments during the period are 
entered on one sales record, and that their amount is $85,000 
for the period, entries (4) would be made charging Accounts 
Receivable and crediting Sales account with this amount. 

Cash Transactions 

Assume that the cash receipts are $105,000 and cash 
payments $103,300 as shown by the cash book, and that these 
totals are made up as follows : 



296 CONTROLLING THE COST RECORDS 

Receipts from Customers $100,000.00 

Notes Receivable 5,000.00 

Paid on account of Notes Outstanding 10,000.00 

Paid to various Creditors 65,000.00 

Paid on account of Pay-Roll during the month 28,300.00 

This information is sufficient for making entries (5) and (6), 
entry (5) being for cash receipts and (6) for cash payments. 
The discounts received, discounts allowed, interest trans- 
actions, and deferred items of expense are omitted from con- 
sideration. The entries so far given represent the usual trans- 
actions which need to be summarized at the end of the period, 
any unusual transactions requiring adjusting journal entries 
not being considered. 

Ledger Accounts 

After posting these items to the ledger, the accounts 
would appear on that record as follows : 

Ca.sh 



Jan. I Balance (i) $38,000 

31 Sund. Recpts.(5) 105,000 



Jan. 31 Sund. Pay'ts. . (6)$io3,300 
Accounts Receivable 



Jan. I Balance (i)$i74,ooo 

31 Sales (4) 85,000 



Jan. 31 Cash (5)$ioo,ooo 

Notes Receivable 



Jan. I Balance (i) $20,000 Jan. 31 Cash (5) $5,000 

Merchandise Inventory 



Jan. I Balance (1)^226,700 

Machinery and Fixtures 



Jan. I Balance ( i ) $35,000 



GENERAL LEDGER CONTROL 
Notes Payable 



297 



Jan. 31 Cash (6) $10,000 



Jan. I Balance (i) $25,000 



Accounts Payable 



Jan. 31 Cash (6) $65,000 

Pay-Roll Account 



Jan. I Balance (i) $64,000 

31 Purchases . . . (2) 65,000 



Jan. 31 Cash (6) $28,300 



Jan. 31 Sal. & Wages (3) $28,300 



Capital Stock 



Jan. I Balance (i)$35o,ooo 

Surplus 



Jan. I Balance (i) $54,700 

Sales 



Jan. 31 Accts. Rec. . (4) $85,000 
Merchandise Purchases 



Jan. 31 Purchases . . (2) $59,000 

Productive Labor 



Jan. 31 Cash (3) $18,000 



Factory Indirect Expenses 



Jan. 31 Purchases ...(2) $2,500 
31 Cash — Non- 
Prod. Labor.. (3) 4,500 



Selling Expenses 



Jan. 31 Purchases ...(2) $1,500 I 
31 Cash — Sal. ..(3) 4,300 j 



298 CONTROLLING THE COST RECORDS 

Administrativk Expenses 



Jan. 31 Purchases ...(2) $2,000 
31 Cash — Sal. ..(3) 1,500 

A trial balance prepared from the above ledger accounts 
at the end of the cost period would appear as follows : 

The Brown Manufacturing Company 

General Ledger Trial Balance 

January 31, 1918 

1 Cash $ 39,700.00 

2 Accounts Receivable 159,000.00 

3 Notes Receivable 15,000.00 

4 Merchandise Inventory (balance, 

January i ) 226,700.00 

5 Machinery and Fixtures 35,000.00 

6 Notes Payable $ 15,000.00 

7 Accounts Payable 64,000.0c 

8 Pay-Roll 

9 Capital Stock 350,000.00 

ID Surplus 54,700.00 

1 1 Sales 85,000.00 

12 Merchandise Purchases 59,000.00 

13 Productive Labor 18,000.00 

14 Factory Indirect Expense 7,000.00 

15 Selling Expenses 5,800.00 

16 Administrative Expenses 3,500.00 

$568,700.00 $568,700.00 



Merchandise Inventory 

The above accounts show the condition of the assets, lia- 
bilities, capital, and surplus, and the transactions affecting the 
items of income and expenses for the period. The charges for 
material, labor, and overhead have been made. But as the 
trial balance does not include the figures as to the value of 
the closing inventory, the cost of sales for the period cannot 
be ascertained, and neither a balance sheet nor a profit and 
loss statement can be prepared. If the factory cost of the sales 



GENERAL LEDGER CONTROL 299 

of $85,000 were determined, the inventory, material, labor, 
and overhead accounts could be credited with the cost of sales 
and thus furnish a basis for ascertaining the value of the mer- 
chandise inventory. Therefore, it should be noted that the 
preparation of financial statements is contingent upon this 
valuation and that their accuracy depends upon the accuracy 
of the method of obtaining the inventory. 

There are two ways of ascertaining the value of the mer- 
chandise inventory. The first method is to make a physical 
count of the items of merchandise on hand, price them at cost 
and add the extensions. This method is rarely resorted to, 
excepting at the close of the fiscal year, because of the clerical 
work involved. 

The second method is to compute the total cost of the 
sales for the period, and with these figures as a basis, the 
value of the merchandise inventory may be calculated as fol- 
lows: 

To the opening merchandise inventory should be added 
the amounts of the merchandise purchases, productive labor, 
and overhead cost for the period, from which sum is de- 
ducted the amount of the cost of sales. This leaves a balance 
which represents the value of the merchandise inventory at 
the close of the period. In other words, the factory is charged 
with the opening inventory and all material, labor, and over- 
head items, and receives credit for the cost of the work done, 
that is, the cost of the sales or shipments made during the 
period. The result would necessarily be the balance of mer- 
chandise on hand, to be accounted for. 

Even in large manufacturing plants provision is not al- 
ways made for the keeping of a perpetual inventory. As the 
merchandise on hand often represents one of the largest of 
the assets, the importance of an accurate inventory needs to be 
emphasized. An inventory taken inaccurately would afifect 
the profits and may affect the compensation of members of the 



300 CONTROLLING THE COST RFXORDS 

organization. Therefore, it is important in every system of 
cost accounts that a check be estabhshed upon the movements 
of the merchandise inventory. 

Controlling Factory Transactions — First Method 

So far the discussion has covered the material, labor, 
overhead, and production reports, and the summarizing cost 
records required to ascertain the total charges and credits af- 
fecting the various accounts. The method of controlling the 
detailed reports and summary records so that the figures con- 
tained therein may be interlocked with the transactions re- 
corded upon the financial books may now be considered. 

The simplest means of controlling factory cost books is 
to keep the factory controlling accounts on the general ledger 
and provide for recording therein the credit for the cost of 
factory production. To accomplish this, two additional ac- 
counts are opened : ( i ) Factory Production account, which is 
credited, and (2) Cost of Sales account, which is debited 
with the value of the shipments made during the period. 

Under simple manufacturing conditions the cost of the 
sales might be debited to the Sales account, if the latter did not 
contain any other transactions. But if returns and allowances 
are also debited to the Sales account, the account would have 
to be analyzed before the proper information as to the sales 
and cost of sales could be ascertained. This analysis would 
also be necessary if the Sales account were credited with any 
adjustments in sales prices and cost of returns. Therefore, 
it is, as a rule, preferable to keep a separate Cost of Sales 
account rather than to have the cost transactions appear in the 
Sales account. 

To return to the consideration of the trial balance given 
above, it is assumed that the factory cost of the sales ($85,000) 
is $60,000, which amount is debited to Cost of Sales account 
and credited to Factorv Production account. The addition 



GENERAL LEDGER CONTROL 301 

of these two accounts to the foregoing trial balance, as shown 
below, gives all the information required to compute the value 
of the closing inventory and prepare financial statements : 

The Brown Manufacturing Company 

General Ledger Trial Balance 

January 31, 1918 

1 Cash $ 39,700.00 

2 Accounts Receivable 159,000.00 

3 Notes Receivable 15,000.00 

4 Merchandise Inventory, January i, 

1918 226,700.00 

5 Machinery and Fixtures 35,000.00 

6 Notes Payable $ 15,000.00 

7 Accounts Payable 64,000.00 

8 Pay-Roll 

9 Capital Stock 350,000.00 

10 Surplus 54,700.00 

1 1 Sales 85,000.00 

12 Merchandise Purchases 59,000.00 

13 Productive Labor 18,000.00 

14 Factory Indirect Expenses 7,000.00 

15 Selling Expenses 5,800.00 

16 Administrative Expenses 3,500.00 

17 Factory Production 60,000.00 

18 Cost of Sales 60,000.00 

$628,700.00 $628,700.00 

The inventory at January 31 is ascertained in the follow- 
ing manner : 

Merchandise Inventory, January i, 1918 $226,700.00 

Factory Charges : 

Merchandise Purchases $ 59,000.00 

Productive Labor 18,000.00 

Factory Indirect Expenses 7,000.00 

Total Factory Charges 84,000.00 

Total Merchandise Inventory and Factory Charges.... $310,700.00 
Factory Production (at cost) 60,000.00 

Merchandise Inventory, January 31, 1918 $250,700.00 



302 



CONTROLLING THE COST RECORDS 



A balance sheet and a manufacturing and profit and loss 
statement prepared at the end of January would appear thus: 



The Brown Manufacturing Company 
Balance Sheet, January 31, 1918 



Assets 

Cash $ 39,700.00 

Accounts Receivable. 159,000.00 
Notes Receivable.... 15,000,00 
Merchandise Inven- 
tory 250,700.00 

Machinery and Fix- 
tures 35,000.00 



Total Assets $499,400.00 



Liabilities 

Notes Payable $ 15,000.00 

Accounts Payable.... 64,000.00 



Total Liabilities . . . .$ 79,000.00 

Capital Stock 350,000.00 

Surplus 54,700.00 

Net Profit for Janu- 
ary r5,7oo.oo 

Total Liabilities and 



Capital $499,400.00 



The Brown Manufacturing Company 

Manufacturing and Profit and Loss Statement 

For the month of January, 1918 

Sales $85,000.00 

Cost of Sales: 

Merchandise Inventory, January i, 1918 $226,700.00 

Merchandise Purchases 59,000.00 

Productive Labor 18,000.00 

Factory Indirect Expenses 7,000.00 



Total Charges $310,700.00 

Less Merchandise Inventory, January 31, 

1918 250,700.00 



Total Cost of Sales 



60,000.00 



Gross Profit $25,000.00 

Expenses : 

Selling Expenses $ 5,800.00 

Administrative Expenses 3,500.00 



Total Expenses 



9,300.00 



Net Profit $15,700.00 



GENERAL LEDGER CONTROL 



303 



Controlling Factory Transactions — Second Method 

If the amount of a merchandise inventory is small, it 
may be sufficient to use the method of control described in this 
chapter. However, in most cases the inventory constitutes an 
asset item of sufficient importance to require a check or test 
of its valuation to be made in detail. This is affected by 
dividing the inventory into its three natural divisions and 
opening a controlling account with each on the general ledger. 
These three divisions are : 

1. Raw Material account 

2. Work in Process account 

3. Finished Stock account 

The Raw Material account is debited with the value of 
the opening inventory and the purchases during the period, and 
credited with the current withdrawals for manufacturing pur- 
poses. 

The Work in Process account is debited with : ( i ) the 
value of the work in process at the beginning of the period as 
recorded on the uncompleted cost sheets; .(2) the material 
charges credited to Raw Material account; (3) the charges 
for the current productive labor; and (4) the total factory 
overhead of the operating departments. It is credited with 
the cost of the articles manufactured and transferred to fin- 
ished stock. 

The Finished Stock account is debited with the cost of 
the articles manufactured and taken into stock, and credited 
with the shipments made during the period. 

Thus the balances of the three above accounts represent 
the raw material, work in process, and finished stock in- 
ventories and take the place of the four accounts : Merchan- 
dise Inventory, Merchandise Purchases, Productive Labor, 
and Factory Production accounts. To illustrate the method of 
controlling factory transactions, when the merchandise inven- 



304 CONTROLLING THE COST RECORDS 

tory is analyzed as above it is assumed that the amount of 
$226,700 as previously shown is analyzed into : 

Raw Material $65,200.00 

Work in Process 32,200.00 

Finished Stock 129,300.00 

$226,700.00 

This analysis, which may be made from the current in- 
ventory sheets, provides the information for starting the three 
controlling accounts illustrated below with entries designated 
by the figure (i). Thus, instead of the total amount of mer- 
chandise inventory appearing in one account, it is divided so 
as to provide classified charges. 

The source of the remaining entries to the three accounts 
may be recapitulated : The purchases of raw material — 
entry (2) — are obtained from the source already described. 
The value of the raw material used in manufacture — entry 
(3) — is obtained from the summary of material requisitions 
for the period. The current productive labor charged to the 
Work in Process account — entry (4) — is taken from the pay- 
roll analysis. This entry, it should be noted, includes only part 
of the wages paid, the non-productive wages and salaries being 
debited to the expense accounts, while the total amount of all 
salaries and wages is credited to Pay-Roll account in the same 
manner as that previously described. 

The factory overhead, as already explained, is compiled 
in separate expense accounts which are closed out to Fac- 
tory Indirect Expense account. This account in its turn is 
closed out to Work in Process account — entry (5). 

After the manufacturing departments have been charged, 
through the Work in Process account, with the various items 
of material, labor, and overhead, provision must be made for 
recording the production of these departments. To this end 
the detailed production reports which show the articles manu- 



GENERAL LEDGER CONTROL 305 

factured are summarized so as to furnish the total cost of 
production. Assuming that the total cost of production as 
reported on a production summary is $40,000, postings are 
made as shown in entry (6). 

Under the method previously described, the cost of sales 
is shown to be $60,000, which amount is credited to Factory 
Production and debited to Cost of Sales account. When the 
accounts are classified for the purpose of analyzing the mer- 
chandise inventory, the cost of sales should be credited to 
Finished Stock instead of Factory Production account, the 
debit entry being the same — to Cost of Sales account. This 
information is posted directly from a cost of sales summary 
and furnishes the basis for recording entry (7). 

After the postings have been made under this method 
of control, the Raw Material, Work in Process, and Finished 
Stock accounts would appear upon the ledger as follows : 

Raw Material 



1918 

Jan. I Balance (i) $65,200 

31 Purchases ... (2) 59,000 



1918 
Jan. 31 Mat'l Req. . . (3) $28,000 



Work in Process 



1918 

Jan. I Balance ( i ) $32,200 

31 Material ....(3) 28,000 

31 Prod. Labor (4) 18,000 

31 Fac. Ind. Ex. (5) 7,000 



1918 
Jan. 31 Production ..(6) $40,000 



Finished Stock 



1918 

Jan. I Balance (r)$i29,3oo 

31 Production . . (6) 40,000 



1918 
Jan. 31 Cost of Sales (7) $60,000 



A trial balance of the ledger prepared from the accounts 
would now read as follows : 



^^o6 CONTROLLING THE COST RECORDS 

The Brown Manufacturing Company 

General Ledger Trial Balance 

January 31, 1918 

1 Cash $ 39,700.00 

2 Accounts Receivable 159,000.00 

3 Notes Receivable 15,000.00 

5 Machinery and Fixtures 35,000.00 

6 Notes Payable $ 15,000.00 

/ Accounts Payable 64,000.00 

9 Capital Stock 350,000.00 

10 Surplus 54,700.00 

1 1 Sales 85,000.00 

15 Selling Expenses 5,800.00 

16 Administrative Expenses 3,500.00 

18 Cost of Sales 60,000.00 

19 Raw Material 96,200.00 

20 Work in Process 45,200.00 

21 Finished Stock 109,300.00 

$568,700.00 $;6S,7oo.oo 

When the inventories are divided into raw material, 
work in process, and finished goods, and separate accounts are 
kept with each on the general ledger, the constituent parts of 
the inventory are recorded among the assets on the balance 
sheet. The balance sheet and profit and loss statement may 
be prepared from the trial balance practically in the same man- 
ner as the statements under the first method; the same pro- 
cedure is also followed in recording the summarized trans- 
actions. This is the simplest method of controlling the cost 
records, as the factory controlling accounts themselves be- 
come a part of the financial system of accounts. 

Proving the Inventory Balances 

The reliability of the inventory balances as shown by the 
controlling Raw Material, Work in Process, and Finished 
Stock accounts depends to a large extent upon the accuracy 
of the clerical work done and the means of proving or testing 
the figures. The general ledger Raw Material account con- 



GENERAL LEDGER CONTROL 307 

trols the raw material ledger accounts; therefore the total of 
their balances should be in agreement with the balance shown 
by the controlling account and should represent the amount of 
material and supplies on hand in the various storerooms of 
the plant. 

In like manner, the general ledger Work in Process ac- 
count (also termed "Manufacturing" account, "Process" ac- 
count, and "Operating" account) controls the charges to jobs 
or orders in the course of manufacture. Therefore its bal- 
ance should equal the total of all charges entered in detail 
on the uncompleted cost sheets. 

The general ledger Finished Stock account controls the 
finished stock ledger accounts; therefore their total balances 
should be in agreement with the balance of the general ledger 
account and should represent the actual quantity of finished 
stock on hand. 

A perfect system of controlling the accuracy of the mer- 
chandise inventory may be installed, yet the figures may not 
agree with the actual facts as shown by the amount of the mer- 
chandise in the storerooms and operating departments. There- 
fore it is necessary to test the accuracy of the balances of the 
detailed records, by verifying them with the actual quantities 
of merchandise on hand. 

Subdivisions of Controlling Accounts 

Where large quantities of different kinds of raw material 
are kept in the same or separate storerooms, a controlling 
account may be kept with each kind of raw material or with 
each storeroom. For example, there might be a raw material 
account for steel parts, another for paints and varnishes, and 
another for miscellaneous materials and supplies, in which 
cases the detailed records would be kept in separate ledgers 
allotted to each classification. 

The Work in Process account might be expanded into 



3o8 CONTROLLING THE COST RECORDS 

separate accounts for each operating department — as in a gar- 
ment factory where the manufacturing cost of the cutting, 
trimming, sewing, and inspecting departments may be sepa- 
rately recorded. This subdivision of the control may be car- 
ried to the point of keeping a separate account for each con- 
tract. Where this is done, all details of the material, labor, 
and overhead costs are posted directly to a separate ledger 
Work in Process account headed with the name of the con- 
tract or a contract number. 

The finished stock may be controlled by means of several 
accounts so as to show the cost of the various kinds of prod- 
uct manufactured. In such a case the account classification 
is generally determined by the method of classifying the sales. 

Controlling Factory Transactions — Third Method 

Where the main or general office is far removed from the 
factory, or when the large amount of capital tied up in the 
inventories makes it desirable to control each major classi- 
fication of the stock on hand separately, the foregoing method 
of control proves inconvenient because of the amount of de- 
tail to be entered on the general ledger. This interferes to 
a large extent with keeping the postings up to date and makes 
the financial records cumbersome and bulky. Therefore, with 
a view to simplifying the method of control, the inventory- 
controlling accounts are often kept in the factory ledger, which 
in its turn is controlled by a single account kept on the gen- 
eral ledger in the main or general office. 

Factory Ledger Controlling Account in the General Ledger 

The single controlling account opened on the general 
ledger is termed "Factory Ledger" account or "Factory" ac- 
count, for the reason that it shows on one side the total fac- 
tory expenditures and on the other the cost of the finished 
goods for the period. The difference between the two, i.e., 



GENERAL LEDGER CONTROL 



309 



the balance of the account, represents the value of the mer- 
chandise inventories on hand. 

The Factory Ledger controlling account is charged with : 

1. Merchandise on hand at the beginning of the period, 

as shown by the inventory record. 

2. The total amount of material purchased, as shown 

by the purchase record or voucher register. 

3. The total amount of salaries and wages paid for 

productive and non-productive labor as shown by 
the pay-roll analysis. 

4. The total amount of factory indirect expenses, as 

shown by the purchase or voucher record, fixed 
schedules, and other analysis records of factory 
expenses. 

The Factory Ledger controlling account is credited with : 

1. The total cost of shipments. 

2. The total cost of work done by the factory, charge- 

able against selling or administrative expenses. 

Using the entries and figures given on 296-298, and con- 
structing a factory ledger controlling account therefrom, the 
result would be as follows : 

Factory Ledger Controlling Account 

Jan. I M'dise Inventory $226,700 Jan. 31 Cost of Sales. . . . $60,000 
31 M'dise Purchased 59,000 

31 Prod. Labor 18,000 

31 Non-Prod. Labor 4,500 
31 Indirect Labor. . 2,500 

Thus the above account replaces the Raw Material, Work 
in Process, and Finished Stock accounts, which are then kept 
in any desired detail in the factory ledger. After all informa- 
tion is posted to the accounts, a trial balance prepared from the 
general ledger would appear as follows : 



3IO CONTROLLING THE COST RECORDS 

The Brown Manufacturing Company 

General Ledger Trial Balance 

January 31, 1918 

1 Cash $ 39,700.00 

2 Accounts Receivable 159,000.00 

3 Notes Receivable 15,000.00 

5 Machinerv and Fixtures 35,000.00 

6 Notes Payable $ 15,000.00 

7 Accounts Payable 64,000.00 

9 Capital Stock 350,000.00 

ID Surplus 54,700.00 

II Sales 85,000.00 

15 Selling Expenses 5,800.00 

16 Administrative Expenses 3,500.00 

18 Cost of Sales Account 60,000.00 

22 Factory Ledger Account 250,700.00 

$568,700.00 $568,700.00 

A balance sheet and a manufacturing profit and loss 
statement may be prepared from this trial balance and the 
supporting ledger accounts without waiting to see whether the 
detailed accounts are in agreement with the balance as shown 
by the Factory Ledger controlling account. 

Classification Chart of General Ledger Accounts 

In large manufacturing concerns it is customary to pro- 
vide a chart or a classified list of accounts showing the exact 
name of each and the transactions to be recorded therein. 
Where the classification is elaborate, it is well to use account 
numbers or symbols so as to facilitate ready reference to 
them and thus save the bookkeepers' time. Such a chart should 
be printed upon heavy paper or cardboard and hung in view 
of those who have occasion to refer to it frequently. Where 
desks are equipped with glass tops and the chart is inserted 
under the glass, reference can be made to it very readily. 

The requirements of each concern govern the number of 
copies of the chart of accounts to be prepared and the mem- 



GENERAL LEDGER CONTROL 311 

bers of the staff to whom they are to be given. Ordinarily 
it is necessary for each clerk in the accounting and cost de- 
partments to have his own copy, while an additional copy 
should be given to the purchasing agent and treasurer or the 
officer who is in charge of the accounting records. Portions 
of the chart of accounts may be given to the plant superinten- 
dent, production manager, factory foreman, stock clerks, and 
factory clerks. 

The chart shown in Form 69 gives a classified list of 
accounts of a large manufacturing concern. 

Arrangement of General Ledger Accounts 

The order in which accounts appear in the general ledger 
depends upon their number and the kind of ledger in use — 
whether a bound book or loose-leaf in form. If the accounts 
are not numerous, it is well to arrange them in the order in 
which they appear in the financial statements so as to facilitate 
the preparation of the latter at the end of each cost period. A 
suggested order of arrangement for the various classes of 
accounts is : 

1. Asset accounts 

2. Liability accounts 

3. Capital accounts 

4. Income accounts 

5. Cost of sales accounts 

6. Selling expense accounts 

7. Administrative expense accounts 

If a loose-leaf ledger is kept, the accounts may be classi- 
fied by tab indexes so as to show each of the above classifica- 
tions under a separate tab. Where an elaborate classification 
of accounts is made, they are often arranged in loose-leaf 
ledgers according to the symbol references. 

When accounts are numerous, those of a like nature are 



31^ 



CONTROLLING THE COST RECORDS 



ASSET. LIABILITY, AND CAPITAL ACCOUNTS 



Name of Account 



No. 



Assets: 

Petty Cash Fund i 

First National Bank 2 

City Trust Company 3 

Salesmen 's Cash Funds 6 

Branch Office Cash Funds 8 

Accounts Receivable A-K 10 

Accounts Receivable L-Z 11 

Suspended Accts. Receivable 14 

Personal Accts. Receivable... 15 

Notes Receivable 18 

Factory Ledger Account 20 

Real Estate — Land 25 

Real Estate — Buildings 26 

Factory Machinery and 

Equipment 27 

Factory Small Tools 28 

Office Equipment 29 

Deferred Charges 35 



Name of Account 



No. 



Liabilities: 

Notes Payable 50 

Accounts Payable 51 

Personal Loans 52 

Accrued Salaries and Wages.. 53 

Accrued Interest 54 

Accrued Taxes 55 

Mortgage 60 

Reserves: 

Depreciation — Buildings 65 

Depreciation — Machinery 

and Equipment 66 

Depreciation — Small Tools 67 

Depreciation — Office Equip- 
ment 68 

Doubtful Accounts 69 

Capital Stock: 

Preferred Issue 75 

Common Issue 76 

Surplus 80 



SALES, COST OF SALES. AND INCOME ACCOUNT 



Name of Account 



No. 



Sales: 

Gowns 90 

Dresses 91 

Suits 92 

Cloaks 93 

Waists 94 

Deductions from Sales: 

Allowances — Gowns 100 

Allowances — Dresses loi 

Allowances — Suits 102 

Allowances — Cloaks 103 

Allowances — Waists 104 



Name of Account 



No. 



Cost of Sales: 

Gowns » no 

Dresses in 

Suits 112 

Cloaks 113 

Waists 114 

Miscellaneous Income: 

Interest Earned 120 

Discount Earned 121 

Miscellaneous Items 122 

Deductions from Income: 

Interest Allowed 130 

Discount Allowed 131 

Miscellaneous Items 132 



Form 69. Classification Chart 



GENERAL LEDGER CONTROL 



313 



SHIPPING AND SELLING EXPENSES 



Name of Account 



No. 



Shipping Expenses: 

Salaries — Supervision 1 40 

Wages 141 

Rent 142 

Packing Supplies 143 

Repairs 144 

Depreciation 145 

Liability Insurance 146 

Light, Heat and Power 147 

Teaming and Cartage 148 

Miscellaneous Expenses 1 49 



Name of Account No. 

Selling Expenses: 

Salesmen's Salaries 160 

Salesmen 's Commissions 161 

Salesmen's Expenses 162 

Advertising 163 

Rent 164 

Printing and Stationery 165 

Postage 166 

Office Supplies 167 

Repairs 168 

Depreciation 169 

Light and Heat 170 

Samples 171 

Telephone and Telegraph 172 

Conventions 173 

Miscellaneous Expenses 1 74 



ADMINISTRATIVE EXPENSES 



Name of Account 



No. 



Executive Salaries 180 

Office Clerks' Salaries 181 

Executive Expenses 182 

Rent 183 

Printing and Stationery 184 

Postage 185 

Office Supplies 186 

Repairs 187 

Depreciation 188 

Light and Heat 189 

Telephone and Telegraph 190 

Charity and Donations 191 

Mercantile Agencies 192 

Association Dues 193 

Collection Expenses 194 

Legal Expenses 195 

Auditing Expenses 196 

Miscellaneous Expenses 197 



of General Ledger Accounts 



3M 



CONTROLLING THE COST RECORDS 



sometimes grouped and supported by subsidiary ledgers or 
analysis records. For example, one sales account may show 
total transactions and be supported by an analytical sales 
record of the product classifications. The total net sales of 
each class could be ascertained by reference to this detailed sub- 
sidiary record. In like manner, instead of several cost of 
sales accounts, one cost of sales account may be supported by 
an analysis record showing the cost of sales for each classi- 
fication in detail. Selling and administrative expenses may 
be treated in the same way. However, in the majority of 
cases, it is simpler to keep detailed general ledger accounts 
with each item rather than separate subsidiary analysis records. 
The operation of the ledger accounts shown in the chart 
on pages 312, 313 is not described in this volume as the subject 
of general accounting is beyond the present scope. The princi- 
ples of double-entry bookkeeping and general accounting 
should be thoroughly understood by anyone who attempts to 
operate a cost accounting system and provide for the method 
of interlocking the cost accounts with the financial accounts. 



CHAPTER XX 

FACTORY LEDGER CONTROLLING ACCOUNTS 

Methods of Keeping the Factory Ledger 

In developing the method of controlhng factory costs, it 
has been noted that under some conditions it is more practi- 
cable to keep a separate factory ledger — variously termed 
"Manufacturing Ledger," "Cost Ledger," "Cost Department 
Ledger," or "Factory Ledger." This record, which controls 
the detailed cost compilations of material, labor, and overhead, 
is usually controlled in its turn, as already stated, by a single 
general ledger account which forms part of the financial ac- 
counting system. 

There are two methods of keeping the subsidiary factory 
ledger. Under the first method it is not self-balancing; under 
the second method it is self-balancing. That is, in the former 
instance, the balance of the Factory Ledger controlling ac- 
count in the general ledger must be obtained before it is 
known whether or not the factory ledger accounts are cor- 
rect, while in the latter instance, the mathematical accuracy 
of the entries can be proved without referring to the general 
ledger controlling account. When the second or self-balanc- 
ing method is used, a "General Ledger" account is kept in the 
factory ledger. Under both methods the factory ledger ac- 
counts are usually divided into the classifications of : 

1. Raw material accounts 

2. Work in process accounts 

3. Part-finished stock accounts 

4. Finished stock accounts 

5. Labor accounts 

6. Factory indirect expense accounts 

315 



3i6 CONTROLLING THE COST RECORDS 

Factory Journal 

To facilitate postings to the factory ledger accounts, a 
factory journal or journal vouchers may be used in the man- 
ner described in Chapter XVIII. If the journal is employed 
for adjusting entries only, a regular two-column book will 
serv^e this simple purpose. It should be remembered, however, 
that the use of a factory journal is often a duplication of 
clerical work, as postings may be made directly to the ledger 
accounts from the detailed cost summaries. 

Raw Material Accounts 

One or several raw material accounts may control the 
items of direct material and supplies classified on the stores 
ledger either by kinds or by location. The number of ac- 
counts and storerooms operated will obviously depend upon 
the requirements in each case. Whatever their number, they 
should provide for the proper test of the detailed items of raw 
material composing the merchandise inventory. 

In the problem given in the preceding chapter, the in- 
ventory of raw material on hand at January 31, 1918, is 
$96,200. If only one controlling account were kept, and it 
was found that the total of the stores ledger balances did not 
agree with the balance of the raw material controlling ac- 
count, the detail postings would have to be verified before the 
discrepancy could be located. But if the stores items were 
divided into several classifications and separate accounts were 
kept for each, errors in postings would more readily be lo- 
cated. In determining the classifications of raw material the 
question to be considered is the need of checking the consump- 
tion and valuation of different kinds of stores. Raw material 
may be stored in several storerooms, and in order to fix re- 
sponsibility upon the stores-keeper in charge, it may be nec- 
essary to control each storeroom separately. 

Under certain conditions the value of the raw material 



FACTORY LEDGER CONTROL 317 

used in the manufacture of different products may vary widely. 
It is important to charge any discrepancies in the raw ma- 
terial stores to the correct product classification, otherwise 
a product with a low material cost would be charged with 
more than its proper proportion. This is particularly essen- 
tial in cases where the compensation of certain members of 
the organization depends to some extent upon the profits re- 
sulting from the sale of certain products. 

Postings to Raw Material Accounts 

The method of posting the transactions to several raw 
material accounts is the same as the method of posting to one 
account, excepting that additional entries may be required to 
record any stock transfers between storerooms. The debits 
and credits and the source of the figures in each case are 
enumerated below. 

The raw materials accounts are debited with : 

1. The amount of inventory on hand at the beginning 

of the period. 

2. The total amount of raw material purchased, as 

shown by the purchase records or voucher regis- 
ter, together with the supporting invoices or ac- 
counts payable vouchers and reports of material 
received. Merchandise returned to the creditors 
should be treated as deductions from the pur- 
chases. 

3. The total amount of stock transfers during period. 

The raw materials accounts are credited with : 

1. The total amount of material issued from stock as 

shown by the summary of material requisitions. 
Material which is returned to stores should be 
treated as deductions from amount requisitioned. 

2. The total amount of stock transfers during the period. 



3i8 CONTROLLING THE COST RECORDS 

Any adjusting entries to bring the controlling accounts 
in agreement with the subsidiary stores ledger or the raw ma- 
terial inventory should be made in the journal and posted to 
the accounts. Obsolete raw material and supplies — which, as 
already stated, are usually kept in a separate part of the store- 
room — should be controlled separately. 

Work in Process Accounts 

The work in process account, or accounts, control the 
cost sheets of either the jobs, orders, or articles in the course 
of manufacture, or the various processes through which the 
product passes. Work in process accounts may be kept in 
three different w^ays, as follows : 

1. One account may control all the work in process. 

2. Separate accounts may control each operating de- 

partment. 

3. Separate accounts may control each job or factory 

order issued, or each process or each machine. 

Where both special and standard products are manu- 
factured, it is well to keep the work in process accounts sepa- 
rately in each case if it is practicable to do so. If the operat- 
ing departments of the plant can be so organized that the 
special product is handled by special employees, this distinctive 
control of the two classes of product may be easily effected. 

The advantages of keeping several work in process ac- 
counts in place of one controlling account are three in number: 

1. Discrepancies are more easily noted. 

2. A test of the inventory value of the work in process 

is more easily made and discrepancies can be ad- 
justed more readily. 

3. If it is necessary to adjust discrepancies in the cost 

of work in process due to unlocated differences, 
several accounts provide more satisfactory means 



FACTORY LEDGER CONTROL 319 

of making the necessary corrections. Adjust- 
ments can then be made upon the one account 
without affecting the other accounts. 

Postings to Work in Process Accounts 

The method of keeping the work in process accounts is 
practically the same for one or several accounts, and in all 
cases includes the entries below. 

The work in process accounts are debited with : 

1. The cost value of the inventory of work in process 

on hand at the beginning of the period. 

2. The direct material received from stores as shown 

by the summary of material requisitions after de- 
ducting material returned to stores. 

3. The direct labor for the period as shown by the pay- 

roll analysis. 

4. The total amount of departmental factory overhead 

as shown by the overhead distribution records. 

The work in process accounts are credited with: 

1. The material, labor, and overhead costs of the pro- 

duction transferred to finished stock, part-finished 
stock, or raw materials stock accounts. 

2. The total material, labor, and overhead costs of any 

machinery, tools, or other equipment which has 
been manufactured for the use of the plant and is 
to be capitalized among the plant assets. 

3. The total material, labor, and overhead costs of main- 

tenance and repairs which have been absorbed in 
the factory overhead. 

4. The total material, labor, and overhead costs of the 

maintenance and repairs, which are absorbed in 
the selling and administrative expense accounts. 



3_>o CONTROLLING THE COST RECORDS 

Adjusting entries to cover discrepancies in the cost of 
work in process would also be debited or credited to the work 
in process accounts. 

Form of Work in Process Account 

Of the several forms of work in process accounts the one 
most commonly employed is the ledger account form, in which 
charges and credits for material, labor, and overhead are 
shown in one money column as illustrated in Form 70. 

If it is required to check the material, labor, and over- 
head charges and credits, this may be done in two ways : 

1. The elements of cost may be recorded in separate' ac- 
counts, as in Form 70, and headed respectively : 

(a) Work in Process Material Cost 

(b) Work in Process Labor Cost 

(c) Work in Process Overhead Cost 

2. The information may all be recorded upon one ac- 
count, as shown in Form 71, with separate columns for the 
charges and credits for material, labor, and overhead. Under 
this method the number of accounts is greatly reduced. 

Part-Finished Stock Accounts 

The part-finished stock account, or accounts, also termed 
"Finished Parts Account," "Manufactured Parts Account," 
"Completed Parts Account," control the part-finished stores 
ledger. One account may be kept for all part-finished stock; 
or the different classes of part-finished stock may each have 
its own account; or the main part-finished storeroom and the 
sub-storerooms may have separate accounts, depending upon 
the requirements of the plant. 

As in the case of work in process, the keeping of several 
accounts instead of one brings to notice any large discrepan- 
cies in costs more readily, as the balances on detailed accounts 
are smaller and large fluctuations can be more easily detected. 



FACTORY LEDGER CONTROL 



321 



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322 CONTROLLING THE COST RECORDS 

If there is only one controlling account, its balance may be so 
large that a discrepancy of a few thousand dollars may be 
passed when the balances are compared at the end of each 
month. When there are several accounts, discrepancies are 
more accurately adjusted, as the differences can then be 
charged to the product to which they are applicable instead of 
being arl)itrarily distributed over the entire production. This 
is an important point when individual compensation depends 
upon the profits from special classes of product. 

The obsolete finished parts carried in stock should be 
controlled separately, as it is important to keep a check on these 
items so that the capital invested in slow-moving stock may 
be reduced to the minimum. Finally, the account classifica- 
tion of part-finished stock facilitates the preparation of factory 
orders for the production of finished parts. 

Postings to Part-Finished Stock Accounts 

Part-finished stock accounts are kept practically in the 
same manner as those for raw material, and the procedure is 
the same for one or several accounts. 

The part-finished stock accounts are debited with : 

1. The total amount of the finished parts inventory on 

hand at the beginning of the period. 

2. The total cost of the finished parts completed and 

transferred to the stock-rooms as shown by the 
production summaries. 

3. The total cost of the transfers made from the various 

storerooms. 

4. The total cost of such items as may be returned to 

the part-finished stock storerooms from the oper- 
ating departments or from customers, as shown 
by detailed summaries covering these returns. 

The part-finished stock accounts are credited with : 



FACTORY LEDGER CONTROL 



323 



1. The total cost of the part-finished stock which is 

transferred to the operating departments for use 
in the manufacture of the completed articles, as 
shown upon a summary of requisitions or a sum- 
mary of departmental material used. 

2. The total cost of the part-finished stock transferred 

to other stock-rooms, as shown by a summary 
of stock transfers. 

3. The total cost of part-finished stock shipped to cus- 

tomers, as shown by a summary of cost of sales. 

The part-finished stock accounts are also debited or cred- 
ited with the amount of any adjustments required when an 
inventory test shows that the controlling accounts are not in 
agreement with the detailed part-finished stores ledgers. 

Finished Stock Accounts 

The finished stock accounts control the finished stock 
ledgers, and, like the stock accounts already described, they 
may be kept in several ways : 

1. One account for all finished stock. 

2. Distinctive accounts for the different classes of fin- 

ished product. 

3. Distinctive accounts for the various finished stock 

storerooms located in different parts of the plant. 

The account classification of finished stock is a valuable 
aid to the issuance of factory production orders and to the 
sales department, as the amount of stock of the different 
classes of product on hand is readily determined if several 
controlling accounts are kept in place of one. Discrepancies 
are more readily located and any necessary adjustments may 
be charged to the proper accounts. The method of entering 
the information to the ledger accounts is exactly the same for 
one or several finished stock accounts. 



324 CONTROLLING THE COST RECORDS 

Posting to Finished Stock Accounts 

The finished stock account, or accounts, are debited with : 

1. The total amount of the inventory of finished stock 

on hand at the beginning of the period. 

2. The total cost of the finished articles as shown by the 

production summary. 

3. The total cost of the finished stock returned by cus- 

tomers as shown by the cost of returns summary. 

4. The total cost of transfers made to a particular store- 

room from other storerooms as shown by the sum- 
mary of transfers. 

The finished stock account, or accounts, are credited with : 

1. The total cost of merchandise shipped, as shown by 

the cost of sales summary. 

2. The total cost of merchandise transferred to operat- 

ing departments of the plant to be used in the pro- 
duction of other articles. 

3. The total cost of transfers to other stock-rooms as 

shown by the summary of stock transfers. 

Entries for adjusting discrepancies are also debited or 
credited to the various accounts, as the case may require. 

Productive Labor Accounts 

Under some conditions, the productive labor is charged 
directly to the work in process account of each department, 
as incurred. This may be a correct method under certain cir- 
cumstances, but its disadvantage is that the total productive 
labor for a fiscal period cannot readily be ascertained. To 
meet this requirement a productive labor account may be 
opened and charged with the direct w^ages week by week, or 
as required, and credited with the charges to departments at 
the end of the period ; or a separate productive labor account 
may be kept for each department and closed out to the work 



FACTORY LEDGER CONTROL 325 

in process account for that department at the end of the pe- 
riod. The needs of each case determine in what detail the 
labor element of cost should be recorded. 

Factory Indirect Expense Accounts 

Each item of indirect expense is applicable to definite op- 
erating departments and provision must be made for showing 
the charge in each case. The simplest method is to open an 
account for each item of overhead for each department, and 
this is the method used in large concerns. The obvious draw- 
back to this method is the large number of expense accounts 
which it entails. The number can be greatly reduced by re- 
cording the information for all departments upon a ledger ac- 
count for each item, as in Form ']2. The form of this ac- 
count may be arranged so that the name of the department 
appears in the heading and the columns show the various 
items of factory overhead applicable to that department, as 
illustrated in Form j^. 

If it is necessary to post any credits to the above accounts, 
they should be entered in different colored ink so as to show 
that the items are to be deducted from the rest of the transac- 
tions, or a separate account for showing credits should be used. 

After the total department overhead is ascertained, pro- 
vision must be made for transferring this total to the depart- 
ment work in process accounts, in which the overhead must be 
absorbed. To make this transfer in the simplest w^ay possible, 
each overhead account may be credited at the end of the cost 
period and the total in each case charged to the work in proc- 
ess account of that department. This procedure, however, 
would necessitate numerous postings. For example, there 
might be from ten to twelve entries to the credit of each item 
of expense, and assuming that there are a dozen or more de- 
partments, the large amount of detailed posting can be readily 
seen, as the ten or twelve overhead items would be applicable 



326 



CONTROLLING THE COST RECORDS 





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FACTORY LEDGER CONTROL 327 

to most of the operating departments. A short-cut may be 
provided by means of a separate account styled "Distributed 
Overhead Account.' 

Distributed Overhead Accounts 

The distributed overhead account is used : 

1. For the purpose of showing the total amount of over- 

head applicable to each department. 

2. For the purpose of saving time in posting when it 

is necessary to transfer the total amount of the 
factory overhead items to the various work in 
process accounts. 

A distributed overhead account should be kept for each 
department of the plant, including productive, non-productive, 
and miscellaneous departments, and for general operating ex- 
penses. \Mien the transfers of the overhead items are made 
to the work in process accounts, the total amount of depart- 
mental overhead is debited to the departmental work-in-process 
account and the total credit is posted to the distributed over- 
head account for that department. This eliminates the neces- 
sity of posting the credits in detail to each of the detailed ex- 
pense accounts. 

This last method is also used in transferring the total 
amount of general operating expenses. The distributed over- 
head account for the general operating expenses is credited, 
and corresponding charges are made to the various non-produc- 
tive department accounts ; a trial balance may then be prepared 
for the factory overhead accounts. This provides a method 
of balancing the factory overhead expense items separately 
from the other factory accounts. The raw material, w^ork in 
process, part-finished stock, and finished stock accounts would 
then show the condition of the items of the merchandise in- 
ventory. 



328 CONTROLLING THE COST RECORDS 

General Ledger Account 

A General Ledger account is opened on the factory ledger 
when it is desired to make the factory ledger self -balancing. 
This account is the reverse of the Factory Ledger account on 
the general ledger. 

The General Ledger account is credited with : 

1. The total amount of merchandise inventory as the 

charges are made to the various raw material, 
work in process, part-finished stock, and finished 
stock accounts at the beginning of the period. 

2. The total amount of merchandise and supplies pur- 

chased during the cost period, as shown by the 
purchase record or voucher register — the raw ma- 
terial accounts being debited. 

3. The total amount of productive and non-productive 

labor for the period, as shown by the pay-roll 
analysis — the productive labor, non-productive 
labor accounts, or work in process accounts being 
debited. 

4. The total amount of factory overhead expenses for 

the period, as shown by the purchase record or 
voucher register and the fixed schedules or mis- 
cellaneous analysis records — the various detailed 
factory overhead accounts being debited. 

5. The total cost of the merchandise returned during the 

period, as shown by the summary of cost returns, 
the offsetting entries being the debits to the vari- 
ous finished stock or part-finished stock accounts. 

The General Ledger account is debited with: 

I. The total cost of sales, as shown by the summary of 
cost of sales — at the time the finished stock or part- 
finished stock accounts are credited, 



FACTORY LEDGER CONTROL '329 

2. The total cost of machinery, tools, or miscellaneous 

equipment as shown by the production summary — 
at the time the various work in process accounts 
are credited. 

3. The total cost of repairs and the total cost of miscel- 

laneous supplies transferred to the selling or ad- 
ministrative departments of the business — at the 
time the various work in process accounts and raw 
material accounts are credited. This information 
would be shown upon the production summaries 
and material requisition summaries. 

The balance of the General Ledger account is always a 
credit, and is in agreement with the total amount of the debit 
balances shown by the other factory ledger accounts, and also 
with the debit balance of the Factory Ledger account upon the 
general ledger. 

Any adjustments in inventory compilations which affect 
the factory ledger accounts must necessarily be reflected by 
means of an entry in the General Ledger account. 

Summary of Factory Ledger Controlling Accounts 

Form 74 summarizes the discussion of the factory ledger 
accounts. 

Classification Chart of Factory Ledger Accounts 

For the same reason that it is advantageous to draw up a 
classification sheet of the general ledger accounts of a large 
manufacturing plant, the factory ledger accounts may also be 
illustrated by means of a chart (Form 75). In preparing 
such a chart, the accounts should be given symbol numbers. 
It may be noted that factory ledger controlling accounts vary 
in number from the three simple accounts previously described 
to several hundred. 



330 



CONTROLLING THE COST RECORDS 




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FACTORY LEDGER CONTROL 



331 



Copies of the chart of accounts should be prepared, 
preferably upon heavy cardboard so as to permit of ready 
reference by the clerks in the accounting and cost accounting 
departments. Copies of suitable portions of the chart should 
also be given to the factory superintendent, foremen, factory 
clerks, production manager, order department clerks, and 
any employees in the organization who may require informa- 
tion for charging or crediting the detailed items to the proper 
accounts. 

Form of Factory Ledger 

A factory ledger may be a bound book or a loose-leaf 
book. In most instances it is more practicable to use a loose- 
leaf book for the reason that sheets with ruling to suit dif- 
ferent accounts may then be inserted in the same binder, thus 
saving the added expense of printing different kinds of rulings 
in the bound book. 

Simple ledger rulings are usually practicable for the raw 
material, part-finished stock, and also the overhead accounts, 
although the items of overhead are often recorded upon a spe- 
cial columnar sheet. The information as to the work in process 
is, as a rule, recorded upon a sheet ruled to suit particular re- 
quirements. 

Arrangement of Factory Ledger Accounts 

The arrangement of the accounts in the ledger should 
receive attention. While they are often arranged according 
to their symbol numbers, as their classification is more or 
less standardized, they may be grouped in sections in the fol- 
lowing order : 

1. Raw material accounts 

2. Work in process acounts 

3. Part-finished stock accounts 



.33-' 



CONTROLLING THE COST RECORDS 



RAW MATERIAL ACCOUNTS 


FINISHED PARTS STOCK 
ACCOUNTS 


Name of Account No. 

Lumber 300 

Raw Material — Paints and Var- 
nish 301 

Raw Material— Steel Parts 302 

Raw Material — Other Items 303 

General Supplies 304 


Name of Account No. 

Finished Sides 330 

Finished Legs 331 

Finished Pulls 332 

Other Finished Parts 333 


WORK IN PROCESS 
ACCOUNTS 


FINISHED STOCK ACCOUNTS 


Name of Account No. 

A* Cutting Department 310 

B Machine Department — 

Special Work 311 

C Machine Department — 

Standard Work 312 

D Assembling Department — 

Special Work 313 

E Assembling Department 

Standard Work 314 

F Finishing Room 315 

G Trimming Department 316 

H Inspecting Department 317 

J Packing Department 318 

* Letters A-J represent productive 
of)erating departments of the plant. 


Name of Account No. 

Desks 340 

Chairs 341 

Rockers 342 

Settees 343 

Cabinets — Standard 344 

Cabinets — Special 345 



Form 



Classification Chart 



4. Finished stock accounts 

5. Productive labor accounts 

6. Distributed overhead accounts 

7. Detailed factory overhead accounts 

The sections should be distinguished by means of tab in- 
dexes marked according to the classifications. Where de- 
tailed overhead accounts are kept for each department, it may 
be well to furnish additional tab indexes within this section 
marked with the departments of the plant so that the overhead 
accounts of one department may be readily distinguished from 
those of another. 

In large plants the factory ledger is divided into two rec- 



FACTORY LEDGER CONTROL 



333 
1 



FACTORY INDIRECT EXPENSES 



Name of Account 



Supervision 

Clerks' Salaries 

Non-Productive Labor..., 

Repairs 

Depreciation 

Insurance — Fire 

I nsurance — Liability 

Rent 

Taxes 

Supplies 

Experimental Work 

Defective Work 

Light, Heat, and Power 

Sundry Expenses 

General Operating 






360 
361 
62 
363 
364 
365 
366 

367 
368 

369 

370 
371 
372 
373 
374 



380 400 

381 401 

382 402 



383 
384 
385 
386 

387 

388 

389 
390 
391 
392 



403 
404 

405 
406 
407 
408 
409 
410 
411 
412 



393413 
394414 



420 
421 
422 
423 
424 
425 
426 
427 
428 
429 
430 
431 
432 
433 
434 



a = 



440 
441 
442 
443 
444 
445 
.46 

447 
448 

449 
450 
451 
452 
453 
454 



460 
461 
462 

463 
464 

465 
466 
467 
468 
469 
470 

471 
472 

473 
474 



480 
481 
482 

483 
484 

485 
486 

487 

488 

489 
490 

491 
492 

493 
494 



500 
501 
502 
503 
504 
505 
506 

507 
508 
509 
510 

511 
512 

513 
514 



520 
521 
522 
523 
524 
525 
026 

527 
528 
529 
530 
531 
532 
533 
534 



540 



542 
543 
544 
545 
546 
547 
548 
549 



553 
554 



°l 



560 
561 



563 
564 



066 
567 



569 



572 
573 



580 
581 
582 
583 
84 
85 
586 

587 



589 



592 
593 



of Factory Ledger Accounts 

ords, one containing the raw material, work in process, part- 
finished stock, and finished stock accounts, and the other con- 
taining the overhead expense accounts. When the method of 
proving the factory overhead separately from the other fac- 
tory ledger accounts is used, as previously explained, the above 
division can readily be made. 



Verification of Controlling Accounts 

Most of the factory ledger accounts are controlling ac- 
counts, and, when a trial balance of the factor}^ ledger is pre- 
pared at the end of the period, provision must be made for 
verifying the balances of the controlling accounts. The veri- 



334 CONTROLLING THE COST RECORDS 

fication of the detailed balances of the controlling accounts 
may be made in several different ways. 

If money values are entered upon the stock records, a 
trial balance may be prepared from the raw material, finished 
parts, and finished stock stores ledgers, and these may then be 
proved with their respective controlling accounts in the factory 
ledger. If money values are not entered upon the stock rec- 
ords, verification of the controlling accounts can be made only 
after cost values are inserted at the end of each period and 
the calculation is made for the entire quantity on hand. There- 
fore, when only quantities appear upon stock records, the con- 
trolling accounts cannot be so readily or so frequently tested. 
All controlling accounts should be verified at least once during 
the fiscal year, because the financial results based upon book 
inventories cannot be accepted as correct without this veri- 
fication. 

If the stores ledger records are in agreement with the 
corresponding controlling accounts, a test should be made of 
the detailed accounts by checking their balances with the 
merchandise actually on hand in the various storerooms. All 
merchandise on hand in the raw material, finished parts stock, 
and finished stock storerooms should be verified by actual 
count at least once during a fiscal period. 

In verifying the balances shown upon the work in process 
accounts, reference must be made to the detailed uncompleted 
cost sheets of the various jobs, orders, or articles in the course 
of manufacture or to the detailed uncompleted process cost 
records. If the total amounts of cost as obtained from these 
detailed cost sheets and cost records are listed and added, the 
result obtained should be in agreement with the balances as 
shown by the work in process accounts. However, differences 
in overhead are bound to occur. The overhead applied to the 
detailed cost records may be based upon a fixed rate or per- 
centage which cannot be absolutely correct — due to fluctuations 



FACTORY LEDGER CONTROL 335 

in production and also to fluctuations in the amount of over- 
head at different times during the fiscal period. When a test 
is made of the balance of the work in process account, con- 
sideration must be given to adjustments of this overhead rate. 

As already stated, the detailed work in process accounts 
should provide for a separate verification of the material, labor, 
and overhead costs. However, the verification with the cost 
sheets or process cost records does not complete the test. The 
latter must be verified with the actual uncompleted work in 
process as shown by reports which should be obtained from 
the various foremen or factory department clerks. 

In large plants, where the records show that work is not 
being done regularly upon certain jobs, the cost sheets relat- 
ing thereto should be investigated to see why the work is de- 
layed. This investigation often leads to a disclosure of dis- 
crepancies in cost. 

Adjusting Discrepancies in Cost 

The verification of the factory accounts with the subsid- 
iary records and with actual facts as they exist in the differ- 
ent storerooms and operating departments of the plant usually 
discloses discrepancies which are bound to occur in the opera- 
tion of every cost system. These discrepancies should be in- 
vestigated, and if they cannot be properly explained, adjusting 
entries should be made upon the detailed records as well as 
upon the controlling accounts affected. Such entries should 
not be postponed until the end of the fiscal period. All in- 
ventory adjustments should be made through an Inventory 
Adjustment account so that these items may be shown sepa- 
rately in the preparation of factory and financial statements. 

Much stress is sometimes laid upon the mathematical 
proof of a cost system at the end of a fiscal period. If at that 
time a single adjustment is made and if the discrepancies 
represent a small percentage of the total cost of production, 



336 CONTROLLING THE COST RECORDS 

the cost expert compliments the system, and incidentally him- 
self. However small in amount the discrepancies may be, the 
fact remains that they may cover up many leaks, which if in- 
vestigated during the fiscal period would probably have led 
to a considerable saving. For example, some items of stock 
may be in excess and others short of their book balances, and 
when an accounting is made at the end of the fiscal period the 
excess amounts may offset the shortages to the extent that only 
a small net amount remains. Thus, the amount of any dif- 
ference is not always a true index of the efficiency of a cost 
system and is not as important as the cause which produced 
the difference. Cost systems are installed for the purpose of 
discovering leaks w^hich should be remedied. Too much at- 
tention may be paid to proving figures rather than to applying 
remedies to prevent discrepancies. 

Closing of Factory Ledger Accounts 

Where the factory ledger accounts form part of the gen- 
eral ledger, the closing entries are made through a Manufactur- 
ing account, and then through the Profit and Loss account. 
Adjusting entries affecting the raw material, work in process, 
and finished stock accounts are made after a physical inventory 
is taken to prove the book balances at the end of a fiscal period. 

Where separate factory ledger accounts are kept they 
constitute a perpetual inventory and the closing of the factory 
ledger accounts is unnecessary. Inventory differences should 
be adjusted when the discrepancies are discovered by tests 
made during the fiscal period. Where complete physical in- 
ventories are not taken at any one time, it is assumed that 
the balances as shown upon the factory ledger are reliable and 
accurate. Adjusting entries are always made when conditions 
show that it is necessary to do so. All adjusting entries 
should be entered in an Inventory Adjustment account, which 



FACTORY LEDGER CONTROL 



337 



amount should be absorbed in the profit and loss transactions 
when the regular financial accounts are closed. 

When the factory ledger accounts are closed at the end 
of each fiscal period, the detailed factory overhead accounts 
should be credited with the total amount debited to the dis- 
tributed overhead accounts. As the credit balances of the dis- 
tributed overhead accounts offset the debit balances of the 
current factory overhead accounts, the closing entries above 
described should balance the factory overhead accounts. As 
the overhead items are transferred to work in process accounts, 
they are necessarily included as part of the merchandise in- 
ventory. 



CHAPTER XXI 

FINANCIAL AND FACTORY STATEMENTS 

Time and Form of Preparation 

In considering the kinds of statements which may be pre- 
pared from cost data, attention must be given to the time of 
their preparation as well as their form. As to time, they may 
be prepared for the particular cost period under review or for 
the current fiscal year to date in cumulative form. Reports 
of a special character dealing with matters which should re- 
ceive the prompt attention of the management may be pre- 
pared daily, weekly, or whenever necessary. As to form, they 
may either be statistical or graphic; that is, they may show the 
results and operations tabulated by means of figures giving 
quantities or values, or both; or the money values and quan- 
tities may be shown by means of graphic charts. The reports 
may cover a particular period or several periods. The figures 
should be so arranged that results may be readily compared 
and also be reduced to percentages or rates as a further means 
of making comparisons. 

Kinds of Reports 

The reports which may be prepared from the information 
shown by a comprehensive cost system may be classified under 
the four following headings : 

1. Reports to executives. 

2. Reports to the sales department. 

3. Reports to the purchasing department. 

4. Reports to the factory superintendent or production 

manager. 

338 



FINANCIAL AND FACTORY STATEMENTS 



339 



in a small business one set of factory and financial state- 
ments, prepared at the end of a definite period, usually suffices 
for the needs of the various executives and department heads. 
In a larger business the statements would, of course, be much 
more numerous and extensive. 

Reports to Executives 

The reports covering a definite period which may be sub- 
mitted to executives would include the following : 

1. Balance sheet, showing the financial condition of the 

concern. 

2. Profit and loss statement, showing the financial opera- 

tions of the concern. 

3. Manufacturing statement, showing the financial 

operations of the factor}^ This statement may 
be combined with the profit and loss statement, or 
it may be prepared upon a separate form and con- 
tain more detailed information as to the results of 
the production. 

4. Statement of merchandise inventory. 

5. Statement showing the additions to, and deductions 

from, the plant and equipment. 

Balance Sheet 

The balance sheet is a statement of assets, liabilities, and 
capital, showing the financial condition of the concern, and 
may be prepared at the end of the cost period. This statement 
is compiled from the general ledger trial balance, with the 
supporting general ledger accounts, and should be arranged 
with attention to some definite classified form, the various 
classes of assets and liabilities being shown under separate 
captions. The different methods of presenting the details of 
the balance sheet are discussed in many works on general 
accounting and need not be considered here. It is only nec.es- 



340 CONTROLLING THE COST RECORDS 

sary to assert that the statement should show the following 
information : 

On the assets side : ( i ) the current assets of cash, ac- 
counts receivable, and bills receivable; (2) working and trad- 
ing assets, which would include the information as to the vari- 
ous classes of merchandise inventory; (3) investments in 
stocks, bonds, and any miscellaneous outside investments; (4) 
fixed assets, such as land, buildings, machinery, tools, furni- 
ture, fixtures, and equipment ; ( 5 ) fixed intangible assets, such 
as good-will, patents, copyrights, trade-marks, and items of a 
similar character; (6) deferred charges, which would include 
unexpired insurance premiums, prepaid rents, prepaid interest, 
and other prepaid expenses chargeable to later operations. 

On the liabilities side : ( i ) the current liabilities of notes 
and accounts payable: (2) miscellaneous loans of stockholders 
or partners which are more or less fixed in character ; (3) fixed 
liabilities, such as bonded indebtedness and mortgages; (4) 
reserves, which include contingent reserves or provision for 
probable losses (if these items are deductible from the asset 
values, they may appear as deductions from the assets on bal- 
ance sheet) ; (5) capital stock, or the capital accounts showing 
the partners' or proprietor's investment in the business; (6) 
surplus, if the organization is a corporation. If a deficit exists, 
the amount may be shown in red ink upon the liabilities side, 
or provision may be made for showing it as a separate amount 
upon the assets side. When it appears upon the assets side, 
care should be exercised to be sure that the total amount of the 
assets is shown separately before considering the deficit. 

The items on the balance sheet should be arranged in a 
methodical and predetermined order, depending to a large 
extent upon the significance of the information to the business. 
Form 76 is a form of balance sheet which illustrates the ar- 
rangement sometimes followed by large manufacturing con- 
cerns. 



FINANCIAL AND FACTORY STATEMENTS 



341 



THE BROWN MANUFACTURING CO. 
New York, N. Y. 

COMPARATIVE BALANCE SHEET 



Details 



Assets: 

Petty Cash Fund 

First National Bank 

City Trust Company 

Salesmen's Cash Funds 

Branch Office Cash Funds.. 

Accounts Receivable 

Notes Receivable 



Merchandise Inventory 

Land 

Buildings 

Factory Machinery and Equipment. 

Factory Small Tools 

Office Equipment 

Deferred Charges 

Total Assets 



Liabilities: 

Notes Payable 

Accounts Payable 

Loans 

Accrued Salaries and Wages.. 

Accrued Interest 

Accrued Taxes 



(Date of 

end of 

Current 

Month) 



Mortgage., 



Total Liabilities 

Reserves: 

Depreciation 

Doubtful Accounts.. 



Capital Stock 

Surplus 

Net Incxjme to Date 

Total Liabilities and Capital. 



(Date of 

end of 
Previous 
Month) 



Increase 

OR 

Decrease 



Form 76. Balance Sheet. (Size. 8 x 16.) 



342 CONTROLLING THE COST RECORDS 

Profit and Loss Statement 

A profit and loss statement is compiled to show the finan- 
cial operations of a business represented by income, costs, and 
expenses. A quite simple form of profit and loss statement 
is illustrated in I'^orm ']'j. This may be supplemented by sup- 
porting schedules showing the data in greater detail. 

In cases where sales are divided into several classifica- 
tions, both the sales and cost of sales should be analyzed by 
departments, and the gross profit in each case may then readily 
be ascertained. In determining the net profit from the opera- 
tion of each sales department, consideration must be given to 
its proportion of the selling and administrative expenses. The 
distribution of these expenses is usually based upon the per- 
centage which the cost of sales of each department bears to the 
total cost of all sales. As in the case of factory overhead 
items, as many as possible of the detailed items of selling and 
administrative expenses should be charged directly to the de- 
partments to which they are applicable. For example, under 
certain conditions the commission rates allowed salesmen upon 
different products sold often vary, in which case an analysis 
of the commissions paid should be made so that each sales 
department may be charged with its correct proportion. 

Often the sales departments or classifications are so well 
established that the salaries of their personnel may be charged 
to them directly rather than distributed upon some Arbitrary 
basis. Office rent may also be distributed on the basis of the 
floor space used in the general or sales offices for the different 
classes of product sold. The remaining items of selling and 
administrative expenses are usually distributed arbitrarily. 

Arbitrary distribution methods may affect the compensa- 
tion of individuals in the organization whose income is derived 
from the sales of certain products. For that reason, this 
method of distributing the selling and administrative ex- 
penses leads to argument when the charge to a particular de- 



FINANCIAL AND FACTORY STATEMENTS 343 

partment is considered an excessive burden. To avoid con- 
troversy the charge is often based on a predetermined percen- 
tage. If this is done it may be found, when the books are 
closed at the end of the period, that some of the items have 
been over-absorbed and others under-appHed. Adjustments 
will then have to be made by distributing the difference over 
departments upon an arbitrary basis, or the net amount of the 
difference may be deducted from or added to the total profits. 

The profit and loss statement is prepared, as a rule, from 
the general ledger accounts unless these show totals which 
control detailed subsidiary ledgers or analysis records. In 
this case reference must necessarily be made to the supporting 
records before a complete profit and loss statement can be pre- 
pared. 

If the statements are prepared for the fiscal period to 
date, the figures of the general ledger trial balance may be 
used. On the other hand, if the transactions cover the current 
cost period only, the data appearing on the statements would 
be obtained from the ledger accounts unless a general ledger 
trial balance is taken at the end of each month. The differ- 
ence between the ending and beginning balances of the income 
and expense acounts shows the net amount of the transactions 
for the period as entered on the profit and loss statement. 

Manufacturing Statement 

The manufacturing statement may be made out sepa- 
rately, or combined with the profit and loss statement, and 
where this is done, it is termed a "Manufacturing and Profit 
and Loss Statement." When made out separately it is termed 
^'Statement of Factory Expenditures" or "Statement of Fac- 
tory Operations." The data for its preparation would be ob- 
tained from the controlling factory cost accounts, kept either 
in the general ledger or in the subsidiary factory ledger. 

In the profit and loss statement the departmental divi- 



344 



CONTROLLING THE COST RECORDS 



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FINANCIAL AND FACTORY STATEMENTS 



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346 CONTROLLING THE COST RECORDS 

sions are based on the classification of the product. In the 
manufacturing statement tliey are based on the departments of 
the factory, and therefore would cover : ( i ) movement of the 
material in the various raw material storerooms; (2) the 
charges and credits affecting the manufacturing departments; 
(3) the movement of the merchandise kept in the various 
finished stock storerooms. 

Form 78 is a simple form of manufacturing statement 
which shows the inventories of, and the charges and credits 
affecting, the operating departments, the raw material, and 
the finished stock. This form of statement may be expanded 
to show a summary of the total of all of these transactions, 
supported by detailed schedules for each operating department. 

The section which deals with the transactions affecting 
the operating departments shows : ( i ) the cost of the work 
in process, and the inventory at the beginning of the month; 
(2) the charges for the material requisitioned from stock, this 
amount being in agreement with the amount of material requi- 
sitioned as shown by the section dealing with the storeroom 
operations; (3) the productive labor charged to the operating 
departments; (4) the items of indirect expenses charged to 
departments. 

From the total of the above charges is deducted the pro- 
duction of finished stock, which should be in agreement with 
the amount charged to finished stock. 

The section covering the raw material transactions starts 
with the opening inventory — which should be in agreement 
with the inventory records and the previous report — and 
shows the purchases and other charges to the raw material 
ledger. After deducting the total amount of material requi- 
sitioned, which should be in agreement with the amount 
charged to the operating departments, the balance of the in- 
ventory on hand at the end of the period is known. 

The section dealing with the finished stock operations also 



FINANCIAL AND FACTORY STATEMENTS 



347 



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348 CONTROLLING THE COST RECORDS 

shows the inventory on hand at the beginning of the period 
and the charges for production, the total of which should be 
in agreement with the amount credited to the operating de- 
partments. From the total inventory and production is de- 
ducted the cost of the sales, which amount should be in agree- 
ment with the cost of sales as shown in the profit and loss 
statement. The resulting balance represents the amount of 
the finished stock inventory at the end of the period. The 
inventory balance for each section should be in agreement with 
the amount of inventory as shown on the balance sheet. 

The form of manufacturing statement here illustrated is 
appropriate for use in small industries. Where the operating 
departments and the classifications of raw material and fin- 
ished goods are numerous, a single form designed to contain 
all the information may be cumbersome. Under these circum- 
stances, several statements would have to be prepared, giving 
the information in detail for each department and for each 
classification of the material and product manufactured. 

Trading Statement 

In mercantile concerns a trading statement is prepared in 
place of a manufacturing statement, to show the trading opera- 
tions and results for the period under review. These transac- 
tions are often combined with the transactions shown in the 
profit and loss statement, and in that case the statement is 
known as a "Trading and Profit and Loss Statement." 

The trading statement shows the sales and the cost of 
sales for the period, the information for this cost being ob- 
tained in the following manner: 

I. To the opening inventory are added: 

(a) Current merchandise purchases. 

(b) Freight and cartage inward. 

(c) Duty and import expenses, if any. 

(d) Any other items of cost. 



FINANCIAL AND FACTORY STATEMENTS 349 

2. From the sum of the above items is deducted the value 
of the closing inventory. The resulting figure 
represents the cost of sales. 

Statement of Merchandise Inventory 

In large manufacturing plants it is often essential to know 
the capital invested in the merchandise inventory, in which case 
a statement showing the amount of the inventory of each of 
the raw material, work in process, finished parts, and finished 
stock classifications should be prepared. This information is 
obtained from the factory accounts, as already noted, which 
may be kept in either the general ledger or a subsidiary factory 
ledger. 

Form 79 represents a form of statement upon which the 
information as to the merchandise inventory may be so ar- 
ranged as to show quantities on hand as well as cost values. 
Under some conditions it is not always necessary to list the de- 
tailed classifications of the inventory in detail, it being suffi- 
cient to show items of a doubtful character or those which 
should be brought to the attention of the executive. 

Statement of Changes in Plant and Equipment 

While the value of the merchandise inventory is usually 
fairly presented in the statements made out at the end of a cost 
period, in many cases fluctuations in the value of plant and 
equipment are ignored until the end of the calendar or fiscal 
year. Arbitrary depreciation rates, depending upon the finan- 
cial results of the business, are then often established. If the 
profit is large, a liberal allowance for depreciation is made; if 
the profit is small or only a fair amount, there may be a cor- 
respondingly small deduction for depreciation. When changes 
in the value of plant assets during the year are ignored, re- 
pairs or maintenance charges which should be absorbed in the 
factory overhead are often capitalized. 



35c> 



COXTROLLTXG THK COST RECORDS 



COMPARATIVE STATEMENT OF 
MERCHANDISE INVENTORY 

For 19 


Details 


(Ending 
Date of 
Current 
Period) 


(Endin); 

Date of 
Previous 

Period) 


Increase 

or 
Decrease 


Summary of Totals: 
Raw Material 












= 


Work in Process 


Finished Parts 


Finished Stock 

Total 












Raw Material: 
Lumber 








Paints and Varnishes 


Steel Parts 


Other Raw Material 


General Supplies 


Total 












Work in Process: 
Cutting Department 








Machine Department: 
Special Work 


Standard Work 


Assembling Department: 

Special Work 


Standard Work 


Finishing Room 


Trimming Department 


TrKinprtinp Dpnartmpnt 


Packing Department 


Total 




= 




=r 




Finished Parts: 
Sides 








Etc 


Total 




^^ 




^=^ 




Finished Stock: 

Desks 










Chairs 

Etc 


Total 












-,, .. 




i 








Form 79. Comparative Statement of Merchandise Inventory. (Size, 8 x i6.) 



FINANCIAL AND FACTORY STATEMENTS 



351 



In order that the management may be kept informed of 
the cost of the up-keep of the building, plant, and equipment, a 
statement should be compiled to show any important changes 
in these asset values. Such a statement may not be necessary 
when additions to plant and equipment are slight, but where 
the value of the assets fluctuates from one period to another. 
as it usually does in large plants, a statement similar to Form 



THE BROWN MANUFACTURING CO. 
New York, N. Y. 

STATEMENT OF CHANGES IN PLANT 85 EQUIPMENT 

For 19 


Details of Changes 


Amounts 


New Equipment Purchased: 












New Equipment Manufactured: 




Equipment Destroyed: 




Other Plant Changes: 






Remarks: 

1 

1 —J 



Form 80. Statement of Changes in Plant and Equipment. (Size, 8 x 16.) 



35-' 



CONTROLLING THE COST RECORDS 



80 should be prepared to show the amount of these valuation 
changes. If complete plant asset records are kept, the state- 
ment can be prepared in detail from these records, the entry of 
transactions relating thereto being shown in total on the con- 
trolling accounts in the general or private ledger. Another 
useful purpose of this statement is that the information it con- 
tains often serves as a check on the unnecessary purchases of 
equipment, revealing as it does the value of the equioment in 
each department. 

Reports to the Sales Departments 

The reports to the sales departments may include : 

'• I. Statement of salesmen's sales, costs, and expenses. 

i 2. Statement of production, shipments, and inventory of 

finished stock. 

^ 3. Daily statement of sales and costs. 

! 4. Statement of special items showing low margin of 
j gross profits or gross losses. 

; 5. Statement of sales, actual costs, and estimated costs. 

' 6. Statement of obsolete and slow-moving finished stock. 

Statement of Salesmen's Sales, Costs, and Expenses 

A statement showing the sales, cost of sales, expenses, 
and profit of individual salesmen, or of a particular territory, 
is a valuable means of judging the efficiency of the sales or- 
ganization. In a small business, this statement may usually 
be prepared from the information shown on general ledger 
accounts and be supported by detailed analyses. In a large 
business analytical records should be kept to show the current 
sales of each salesman — which are proved with the total net 
sales as shown by the sales and return sales summaries — and 
the cost of sales. This information clearly reveals the amount 
of business done by each salesman, and the cost of the business 
is proved with the cost of sales account in the general ledger. 



FINANCIAL AND FACTORY STATEMENTS .353 

The expenses and commissions of each salesman may be 
shown in separate general ledger accounts. Sometimes, how- 
ever, details as to commissions and expenses are kept in a sub- 
sidiary analysis record, which should be in agreement with the 
total of the salesmen's expenses and commission accounts as 
shown on the general ledger. A statement of this character is 
valuable as a means of ascertaining the rates of commissions 
to be allowed on the different products sold and as a guide in 
awarding a bonus for exceptional effort on the part of indi- 
vidual salesmen. 

Form 81 is a simple form which provides the spaces, and 
columns for recording the sales, cost of sales, and expenses of 
individual salesmen. Other columns may be added, to show 
daily averages of the sales, costs, and expenses, as a means of 
judging whether or not the traveling and hotel expenses of an 
individual salesman are excessive. It follows that a statement 
of this character may be used to advantage in adjusting sales- 
men's commissions and expense allowances. 

In many businesses, sales also originate through a mail- 
order or through showroom orders, in which case they may not 
be credited to an individual salesman. Where a mathematical 
proof of the bookkeeping work is required, all orders which 
are received direct in the above way should be grouped under 
a caption termed "Miscellaneous Sales." This method pro- 
vides for proving the totals of the sales when an analysis is 
made. 

It will be noted that Form 81 shows a column for net sales 
only. Under some conditions it may be well to provide for 
columns showing gross sales, returns and allowances, and net 
sales. If discount rates differ upon the various products manu- 
factured, columns should also be provided for recording the 
rate and the amount of discount to be deducted from the sales 
in order to ascertain the profit resulting from the business done 
bv each salesman. 



354 



CONTROLLING THE COST RECORDS 



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FINANCIAL AND FACTORY STATEMENTS 



355 



Statement of Production, Shipments, and Inventory of Fin- 
ished Stock 

The statement which shows the condition of the merchan- 
dise inventory and the movements of finished stock has been 
discussed under the head of reports to executives. It is often 
desirable to submit a similar, but more detailed, statement to 
the sales department, showing the cost value of the current 
production, shipments, and inventory of the finished stock 
items, as illustrated in Form 82. Columns are provided 
thereon for recording the inventory at the beginning of the 
period, to which should be added the cost of current produc- 
tion. The total of these two columns is entered in the total 
amount column, and the deduction for the cost of the current 
shipments in a fourth column. The resulting balance, which 
represents the inventory on hand at the end of the period, is 
entered in the last column. This statement may be prepared 
either for all of the various classifications of the product, or 
for only those items which should receive the special attention 
of the sales department so that an additional effort may be 
made to sell lines which are becoming obsolete or which are 
slow-moving. 

Daily Statement of Sales and Cost of Sales 

It is often advisable to prepare a daily statement (Form 
83) of sales, cost of sales, and gross profits as an aid to the 
sales department in judging the efficiency of the sales force. 
If the product manufactured is standard and the articles in the 
line are numerous, such a statement may present an extensive 
classification of the product. For example, it may show the 
shipments of each line and the returned merchandise sepa- 
rately, so as to establish a proof of the financial statements 
when they are prepared at the end of the cost period ; or it may 
be prepared for special lines only which show a loss or a poor 
margin of profit. The detailed routine of a complete cost sys- 



356 



CONTROLLING THE COST RECORDS 



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CONTROLLING THE COST RECORDS 



THE BROWN MANUFACTURING CO. 
New York, N. Y. 

STATEMENT OF SALES SHOWING LOSSES AND 
SMALL PROFITS 

For 19 


Name of Customer 

AND 

Nature of Sale 


Sales 


Cost 

OF 

Sales 


Gross 
Profit 
OR Loss 


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Totals 































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Form 84. Statement of Sales, Showing Profit or Loss on Special Items. 

(Size, 9 X 16.) 



tern should provide a means of bringing such items to the 
attention of the management. At the end of the month, there- 
fore, it is well to tabulate these items in statement form for the 
purpose of submitting them to the sales department, which can 
then dispose of them as seems fit. 

The reason for the poor margin of profit or the reason for 
the gross losses should also be stated. It may be due to an in- 
accurate estimate of the selling price, or to extraordinary con- 
ditions affecting the material, labor, or overhead costs. 

Form 84 may be used for preparing a statement showing 
*he results of gross profit or loss upon special items or lines. 



FINANCIAL AND FACTORY STATEMENTS 359 

Statement of Sales, Actual Costs, and Estimated Costs 

A check upon the work done by the estimating department 
is always advisable, and this may be accompHshed by a state- 
ment which compares actual with estimated costs. Such a 
report is very valuable where special products are manufac- 
tured for the individual requirements of customers, or where 
bids are ofiferecl and prices are based upon an estimate of 
costs. 

The statement should give the order number, a descrip- 
tion of the product manufactured, and sales or contract prices, 
while the actual cost and estimated cost of each order should 
be tabulated in separate columns. It may also be well to 
furnish a detailed comparison of the elements of cost; that is, 
the actual material, labor, and overhead costs on each order 
may be compared with the estimated costs of these items. In 
this way, the cause of any errors in the estimate is often dis- 
covered. Some estimating clerks may be fairly well informed 
as to labor cost but may take too much for granted when esti- 
mating the material requirements. Or again, it may be found 
that changes in overhead rates are responsible for the errors 
in making up the original estimate of costs. 

In this connection it is important to emphasize the neces- 
sity of co-operation between the cost and estimating depart- 
ments. The cost department can be of assistance to the esti- 
mating department when items of a similar character are 
manufactured or when a request is received for an estimate 
on an order which was manufactured some years ago. The 
cost department records should be accessible to the estimating 
department, and if co-operation exists between the two, a 
better basis obtains for providing the sales department with 
the figures needed to make a satisfactory selling or contract 
price. 

Form 85 is a simple form which may be used for report- 
ing the information as to sales, actual costs, and estimated 



36o 



CONTROLLING THE COST RECORDS 







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New York, N. Y. 

SALES— ACTUAL AND ESTIM^ 

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costs. This form may be developed by the addition of other 
columns to show departmental costs when these are desired 

Statement of Obsolete or Slow-Moving Finished Stock 

When it is more advantageous to have the information as 
to obsolete or slow-moving stock appear upon a separate state- 
ment, this may be prepared in addition to the statement of pro- 
duction, shipments, and inventory of finished stock which has 
been previously mentioned. A statement of this kind should 
show quantities as well as costs. The tendency in most fac- 
tories is to allow obsolete articles and material to accumulate 
for a long period, no effort being made to dispose of them. 
Such obsolete stock and material may form part of the inven- 
tory year after year. As a rule, it is only brought to the atten- 



THE BROWN MANUFACTURING CO. 
New York, N. Y. 

STATEMENT OF OBSOLETE FINISHED STOCK ITEMS 

For 19...... 


Style or 

Grade 

No. 


Description of Article 


Quantity 


Value 

















































. 



Form 86. Statement of Obsolete or Slow-Moving Stock. (Size, 8 x ii.) 



362 CONTROLLING THE COST RECORDS 

tion of the management when an inventory is taken at the end 
of the fiscal period, and often, under these circumstances, no 
definite decision is reached as to its disposal. If the cost sys- 
tem provides for the preparation of a special report on these 
items at the end of definite periods, this helps to arouse the 
sales department to action and leads to the disposal of those 
items which are salable. Form 86 may be used to show the 
value of the obsolete finished stock items. 

Reports to the Purchasing Department 

Not much is required in the way of reports to the pur- 
chasing department, as this department is chiefly interested in 
the raw material and supplies on hand, concerning which in- 
formation can readily be obtained from the stores ledger. 
This information may be supplemented by the following re- 
ports : 

1. Statement of merchandise purchases and inventory of 

raw materials. 

2. Statement of obsolete raw materials. 

3. Statement of maximum and minimum quantities com- 

pared with the inventory quantities. 

The above statements, which may all be prepared from 
the information shown by the stores ledger accounts, give par- 
ticulars of each item composing the raw material inventory — 
unless the classification of materials is so extensive that it is 
practicable to call the attention of the management only to 
items of an extraordinary character. 

Form 87 summarizes the purchases and inventory of each 
class of raw material. It may readily be expanded to give 
further information as to the material used during the period 
or month. In that event the inventories on hand at the be- 
ginning and end of the period, together with the purchases for 
the period, would provide the purchasing department with a 



FINANCIAL AND FACTORY STATEMENTS 



363 



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CONTROLLING THE COST RECORDS 

















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New York, N. Y. 

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basis for judging whether or not the factory was overstocked 
on any particular item. 

If data as to the obsolete stock of raw materials on hand 
does not appear upon the above statement, a special report of 
these items should be submitted explaining why they are not 
being used. If they cannot be used in the course of manufac- 
ture, or if they cannot be substituted for other items, some de- 
cision should be reached as to their disposal. Form 88 is a 
simple form for reporting the value of obsolete stock. 

The third statement listed above which compares the 
maximum and minimum quantities with the inventory quanti- 
ties of the raw material items furnishes valuable information 
for estimating the material requirements of the factory in the 



THE BROWN MANUFACTURING CO. 
New York, N. Y. 

STATEMENT OF INVENTORY QUANTITIES 

For 19 


Article 
No. 


Description 

OF 

Article 


Inven- 
tory 
Qty. 


Maxi- 
mum 
Qty. 


Mini- 
mum 
Qty. 


Over 

OR 

Short 































































Form 89. Statement of Maximum and Minimum and Actual Quantities. 

(Size, 8 X II.) 



366 CONTROLLING THE COST RECORDS 

near future. The first essential step towards efficiency in the 
purchasing department is to insure an adequate stock of raw 
materials and supplies so that the material needed for definite 
orders may be promptly available. Orders must be completed 
on the date promised if customers are to be satisfied. A com- 
parison of the maximum quantities with inventory quantities 
may also show that the factory is overstocked on some items 
and thus enable the proper balance to be struck between suffi- 
ciency and surplus or excess. The information for this report 
may be shown satisfactorily upon a form similar to Form 89. 

Reports to Factory Superintendent and Production Manager 

Reports to the factory superintendent and production 
manager should cover every phase which reflects the efficiency 
of the manufacturing departments, and may include: 

1. Statement of costs and production. 

2. Statement of labor statistics and cost averages. 

3. Statement of obsolete orders in process. 

4. Statement of factory expenses composing the fac- 

tory overhead. 

5. Statement of machine statistics showing repairs, 

shut-downs, etc. 

Statement of Costs and Production 

A detailed statement of costs and production may be 
prepared for each operating department, and in some cases it 
may be practicable to combine the information upon one form. 
The report would be prepared from the work in process ac- 
counts and should summarize and analyze the material, labor, 
and overhead items of cost by kinds and classes of product, as 
illustrated in Form 90. If the inventory on hand at the be- 
ginning and end of the period is also shown, this enables the 
factory superintendent to judge whether or not too much work 
in process is accumulating in the plant. Reports of this char- 



FINANCIAL AND FACTORY STATEMENTS 



2f>r 



STATEMENT OF COSTS AND PRODUCTION 

Department 

For 19 


Details of Charges 


Current 
Period 


Previous 
Period 


Increase 

or 
Decrease 


Material Charges 














Productive Labor Charges 


Overhead Charges : 
Supervision 


Non-Productive Labor 


Repairs ... > 


Depreciation 


Insurance .' 


Taxes 


Rent 


Supplies 


Defective Work 


Experimental Work 


Light, Heat, and Power 


Sundry Expenses 


Total Charges 








SUMMARY OF CHARGES 


Details 


Total 


VIaterial 


Labor 


Overhead 


Work in Process (Beginning) 




— 




— 









— 


Total Charges (as above) 


Total 

Work in Process (Ending) 

Balance (Production) 


PRODUCTION 


Details 


Current 
Period 


Previous 
Period 


Increase 

OR 

Decrease 


Standard Production: 




— 




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— 


Etc 


Cabinets 


Other Work 


Totals 















i 







Form 90. Statement of Costs and Production. (Size, 9 x 16.) 



368 CONTROLLING THE COST RECORDS 

acter, when compared with those of previous periods, often 
show discrepancies in cost charges. 

If possible, a statement of production and costs should 
show the quantities of articles manufactured where the product 
is made for stock or where process costs are required. Aver- 
age unit costs may then be obtained and can be used as a check 
on the efficiency of the operating departments. 

Statement of Labor Statistics and Cost Averages 

Form 91 may be used for presenting labor statistics and 
cost averages, such as the number of productive and non-pro- 
ductive employees in each operating department, total wages 
paid during the period, average daily and weekly wages paid. 
The labor statistics may be elaborated further by showing 
the number of employees at the beginning of the period, num- 
ber of new employees added, and number of employees who 
have left. Information of this character is valuable as a 
means of estimating tendencies in the labor market. For ex- 
ample, it may be discovered from the statistics that more men 
than usual leave at certain times during the year, when perhaps 
the labor market shows a shortage. At other times there may 
be an abundant labor supply and the reports may show that 
few employees leave the shops during that particular period. 
Such information is a valuable aid in judging w^hether or not 
new business should be added to the regular production at cer- 
tain periods of the year. 

Statement of Obsolete Orders in Process 

Obsolete or slow-moving uncompleted orders in process 
should be called to the attention of the factory superintendent 
upon a report similar to Form 92. Information for preparing 
this report is obtained from the uncompleted cost sheets and 
other cost records. Orders sometimes go astray or are lost 
in the course of manufacture, yet the uncompleted cost sheets 



FINANCIAL AND FACTORY STATEMENTS 



369 








370 



CONTROLLING THE COST RECORDS 



THE BROWN MANUFACTURING CO. 
New York, N. Y. 

STATEMENT OF OBSOLETE ORDERS IN PROCESS 

For 19 


Order or 
Job No. 


Description 
OF Work 


Date of 
Order 


Accumulated 
Cost 






















1 










1 










I 

































Total 


















— 



Form 92. Statement of Obsolete or Slow-Moving Orders in Process. 

(Size, 8 X II.) 

and records still show that they form part of the work in proc- 
ess inventory. If the attention of the management is drawn 
to these items by means of a regular report they may be in- 
vestigated, and, if advisable, their cost written off the r)o'~k.<;. 

Statement of Factory Expenses 

The form of the statement of factory expense will depend 
to some extent upon the method of overhead distribution in 
use. The report may be arranged to show the indirect ex- 
penses applicable to each department, or separate departmental 
reports may be rendered. If the rates are fixed in advance, 
these should be compared with the actual rates for the period. 
This information, which may be entered upon a form similar to 



FINANCIAL AND FACTORY STATEMENTS 



371 



Form 93, may be obtained from the factory expense accounts. 
Any unusual increases in items of expenses should be noted for 
the attention of the management. 



THE BROWN MANUFACTURING CO. 
New York, N. Y. 

STATEMENT OF FACTORY EXPENSES 

Department 

For 19 


Details 


Current 
Period 


Previous 
Period 


Increase or 
Decrease 


Supervision 














Clerks' Salaries 


Indirect Labor 


Repairs 


Depreciation 


Insurance — Fire 


Insurance — Liability 


Rent 


Taxes 


Supplies 


Experimental Work 


Defective Work 


Light and Heat 


Power 


Sundries 


General Operating 


Totals 














COMPARISON OF OVERHEAD RATES 


Established Rates 








Actual per Above Expenses 















Form 93. Statement of Factory Expenses. (Size, 8 x 11.) 

Statement of Machine Statistics 

If the machine rate method of overhead distribution is in 
use, the report should show th^ items chargeable to each ma- 



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FINANCIAL AND FACTORY STATEMENTS 373 

chine; and the report may cover the entire plant, or separate 
reports may be rendered for each machine. The form may 
be elaborated for comparing the current machine rates with 
those for the previous period, or with the standard rates. 

Machine statistics dealing with the repairs and mainte- 
nance charges on particular machines may also be prepared 
separately and submitted on a form similar to Form 94, and 
may be combined with the expense report described above. The 
most important feature of this report is the number of operat- 
ing hours, commonly termed "running time," as it enables com- 
parisons to be made with the standard time or previous records. 

Summary of Financial and Factory Statements 

The financial and factory statements which cover the 
operation of a complete cost system are shown on Form 95. 

Method of Presenting Statements 

All information contained in the reports described in this 
chapter may be obtained from the accounts, trial balances, and 
cost summaries without the necessity of closing the accounts. 
After the books of original entry are closed for the period, and 
current transactions are posted to the general and factory 
ledgers preparatory to taking a trial balance, the trial balance 
figures should be in agreement with those of the supporting 
subsidiary records. The reports may then be prepared for the 
period under review. 

Reports should be submitted regularly and should be pre- 
sented as promptly as possible. To be of value they must be 
up to date. 

The style of the form used will obviously depend upon the 
information which is desired, the governing conditions being 
the needs of the executive. As he is not a trained bookkeeper 
or accountant, the forms should be presented in the simplest 
possible way. Some executives prefer all facts and figures to 



374 



CONTROLLING THE COST RECORDS 



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FINANCIAL AND FACTORY STATEMENTS 



375 



be entered upon one large sheet. This often leads to the use 
of a cumbersome sheet which is so elaborate that the informa- 
tion shown can be grasped only by one thoroughly familiar 
with the detail. 

While reports usually cover past performances, they also 
ser\^e as a basis for future action. Unless the information 
shown upon them is actually being used or means something 
to the executive to whom it is submitted, it is worthless. Con- 
siderable time is often wasted in the preparation of elaborate 
statements which are of little, if any, value to the man for 
whom they are prepared. To sum up, reports are compiled 
to be studied by executives and department heads with the ob- 
ject of remedying defects or improving existing conditions. 

Disposition of Statements 

Reports accumulate very rapidly and ample provision 
should be made for a ready reference to them if they are to be 
of any value as a means of making comparisons. Cumber- 
some sheets are apt to be folded and inserted in desk pigeon- 
holes or drawers, and, when it is desired to refer to old reports, 
time is wasted because the information cannot be obtained 
readily. Therefore, in designing the forms it is well to con- 
sider the use of a standard size sheet for all reports. This will 
permit their being filed in a loose-leaf binder indexed by means 
of tabs used to mark the different kinds of reports. 

The practice of binding all reports together for one defi- 
nite period often leads to confusion when comparisons are de- 
sired. A better practice is to combine those of like character, 
when they may not only be compared readily, but also quick 
reference may be made to a particular report of any period. 

Style and Ruling of Reports 

Specially ruled reports which are prepared to meet the 
requirements of a particular industry are expensive. Often 



376 CONTROLLING THE COST RECORDS 

large numbers of forms are printed; conditions then change 
and the stationery has to be scrapped. As generally only one 
report form a month is used, it will be seen that to print any 
quantity is not economical. Therefore, in most instances the 
reports may be typed or prepared with pen and ink upon 
standard-ruled sheets. Different styles of ruling often answer 
the needs of several reports. 

Interlocking and Agreeing Reports 

The information shown upon two or more reports may 
often be combined into one, while some reports may be elimi- 
nated if Uiey fail to fill a need. Wherever the figures in one 
report are the same as those in another, they should be com- 
pared to see that the results and financial facts interlock or are 
in agreement. Under some circumstances cost summaries 
may be designed to serve as reports to the management. 

Time of Presenting Reports 

To insure the attention of the management being given 
to the reports, it is well to have regular conferences, at which 
time the information as shown thereon may be discussed. If 
this is impracticable, the report should provide space for any 
remarks as to special items which it contains, or the remarks 
may be submitted in the form of an attached communication. 

The work on regular reports should not interfere with the 
preparation of special reports at any time that information of 
a special character is desired. A cost system is a source of 
detailed information to which the management should have 
access. As it is impossible for executives and department 
heads to examine the accounts and records, any useful in- 
formation should be submitted in report form. Too often, 
information is submitted in verbal form which should be em- 
bodied in regular written reports. 



CHAPTER XXII 

METHOD OF TAKING INVENTORY 

Inventory Methods 

Because cost-finding provides for the keeping of a per- 
petual inventory, it does not necessarily follow that the taking 
of physical inventories is entirely eliminated. Physical inven- 
tories must be taken at regular intervals and the cost accounts 
verified with actual facts, as shown by an actual count of the 
items of stock on hand in the raw material, finished parts, and 
finished stock storerooms as well as the work in process in the 
operating departments. This verification is necessary to ascer- 
tain discrepancies as soon as they arise. 

Even where an up-to-date cost system is in use, adjust- 
ments in the valuation of inventory items have to be made from 
time to time. For example, certain items may become obso- 
lete, or market conditions both as to the purchase of materials 
and the sale of finished product may change, making it neces- 
sary to adjust the valuations of certain items when financial 
statements are prepared. A cost system does, however, 
eliminate the necessity for taking a complete physical inven- 
tory in a limited time for the reason that, values being recorded 
in the books, the physical count and check may be done grad- 
ually and the work spread over the year. This method is used 
when the records of the cost system are reliable and form a 
basis for a physical inventory. When no cost system is in 
operation and when it is desired to ascertain the financial con- 
dition of the concern, an actual physical count of all items 
composing the merchandise inventory must be made at a defi- 
nite time. 

377 



378 CONTROLLING THE COST RECORDS 

Testing the Inventory 

When different portions of the merchandise inventory are 
tested at different times during the year, it is often practicable 
to have a fixed schedule showing what items should be tested 
and the dates when the tests should be made. .\ simple inven- 
tory test form is given in Form 21, page 93. This form is 
intended for testing the correctness of the entries in the de- 
tailed stores ledger accounts, finished parts, and finished stock 
accounts. It may provide for a test as to quantities only or 
for valuations as well. 

The information as to the actual amounts and quantities 
should be shown on the form and these amounts should be 
compared with the balances of the ledger accounts. Any 
differences should he investigated, as it may be found that vari- 
ous charges and credits have been posted to the wrong stores 
ledger accounts. These clerical errors should be adjusted and 
the inventory discrepancies eliminated. When after thorough 
investigation the differences cannot be located, provision should 
be made for charging the items to an Inventory Adjustment 
account on the general ledger. This will guard against the 
"covering up" of this information. 

Inventory Adjustments 

Inventory adjustments should not be absorbed in the 
factory overhead without calling the attention of the manage- 
ment to their necessity. If a record of these items is estab- 
lished, comparisons may then be made with future periods 
until they finally reach a minimum. Under certain conditions 
these adjustments may need to be made because of thefts, 
short-weights, or intentional tampering with the stock. In 
such cases, the loss should not be absorbed in the factory over- 
head but should be charged as a special deduction to profit and 
loss. 

In many businesses, it is the practice to give stock away as 



METHOD OF TAKING INVENTORY 379 

samples or for other purposes, often without any record of 
their disposal. If the records are to be accurate, the cost of 
such gifts should be charged to a Sample Expense account 
and included among the selling expenses. Gifts also may be 
a selling or administrative expense charge and as such should 
be deducted from the factory gross profit. The value of free 
goods is often not realized until a record is kept of their 
amount. 

Inventory Sheet 

For the purpose of checking the controlling inventory ac- 
counts, the information shown upon the detailed inventory test 
forms may be summarized upon a regular inventory sheet such 
as shown in Form 22, page 94. This form is more or less 
standardized and is sold by large stationery houses. It may 
be used for summarizing the inventory of raw materials and 
supplies, finished parts, and finished stock items when actual 
physical or book inventories are calculated. 

The items of work in process may be summarized upon a 
specially ruled inventory sheet. It should provide columns 
for details as to the material, labor, and overhead costs. Form 
96 is a sample sheet for this purpose. 

Physical Inventories 

Where no perpetual inventory is kept, a physical inventory 
should be taken at least once during the fiscal year, for the 
purpose of ascertaining the financial condition. In large 
manufacturing plants the taking of a physical inventory is 
often a burdensome and complicated undertaking. The list- 
ing and counting of the items composing the merchandise on 
hand is usually made upon inventory sheets similar to those 
of Form 22 (page 94) and Form 96. This method of taking 
the inventory is, however, unsatisfactory in that too often the 
work is done hurriedly and in haphazard fashion. 



38o 



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METHOD OF TAKING IXVENTORY . 381 

A cost system, to be accurate, must be based on the facts 
shown by a physical merchandise inventory. Therefore it is 
most essential that the latter should be complete and thorough. 
Many systems fail because of an inaccurate inventory used as 
the starting point. Discrepancies then appear in the balances 
within a short time, and in explanation of these discrepancies 
the suggestion is made that they are perhaps due to errors in 
the opening inventory. This throws the whole system out of 
gear and is a frequent cause of discouragement to employees 
who are making a sincere effort to keep accurate records. 

In considering the taking of a physical inventory, the 
following points should be noted : 

1. Preparatory work for the inventory. 

2. Instructions to be issued. 

3. Method of taking the inventory. 

4. Method of listing items. 

5. Method of pricing items. 

6. ]\Iethod of figuring items. 

7. IMethod of checking the inventory. 

8. Method of proving and summarizing the inventory. 

Preparation for Physical Inventory 

Some time before the date for taking a physical inventory, 
instructions should be issued to the factory foremen and fac- 
tory clerks to prepare for this work, which will be done during 
a certain period. In large plants, while the work is in prog- 
ress, all manufacturing operations should cease, as it is im- 
possible to make an accurate count of items while the plant 
is in operation. In smaller plants it may be possible to take a 
fairly accurate inventory while work is being done, but these 
instances are few and accuracy may be sacrificed for the sake 
of speed. 

The preparatory work consists of cleaning up the stock- 
rooms and operating departments to see that all items are 



382 CONTROLLING THE COST RECORDS 

stacked in an orderly manner. Raw materials which are 
found on workmen's benches or which are in the operating de- 
partments should be sent to the stock-rooms to be placed in the 
proper bins, drawers, or racks. Material of like character 
should be grouped or stacked in some definite arrangement so 
as to enable a rapid count to be made. Material hidden away 
in corners or "nooks" of the storerooms and departments 
should be brought out where it will receive attention. Ob- 
solete items or materials which are slow-moving should be 
stacked separately. 

Special orders, standard product orders, repair orders, 
and construction orders which are in process in the operating 
departments should be kept in distinctive piles. The work in 
process is often difficult to describe in the inventory, and there- 
fore all items that can possibly be transferred to stock or reach 
a definite state of production should receive attention during 
the period when the preparatory work is being done. Some 
of this preparatory work can be handled only when the plant 
is shut down, but a large part of it may be done beforehand. 

Department foremen sometimes try to rush the current 
work through and transfer it to subsequent operating depart- 
ments so that they will have little to do when the time comes 
to take the inventory. As this practice may disorganize pro- 
duction, it should be discouraged. 

Instructions as to the Taking of the Inventory 

Instructions as to the method of taking the inventory 
should be given to the employees responsible for the counting, 
entering, checking, listing, pricing, calculating, summarizing, 
and proving of the items. Instructions should be plain and 
should specify that the machiner}^ tools, and miscellaneous 
equipments are not to be included in the inventory. If an in- 
ventory of these items is desired, it should be taken separately 
upon records prepared especially for the purpose. 



METHOD OF TAKING INVENTORY 383 

The instructions should be typed and handed to the clerks 
responsible for the work so that they will know exactly what 
to do and the manner in which it should be done. This in- 
formation should cover the order of counting and entering the 
items and the description to be entered upon the inventory 
sheets or tags. Any instructions covering work in process 
should be explicit. When only partial information is sent to 
the office, costs cannot be properly calculated because the de- 
scription of the job is not sufficient to identify it. 

Method of Taking the Inventory 

The method of taking the inventory depends to some ex- 
tent upon the lay-out of the plant, the products manufactured, 
and the existing conditions and time allotted to the task. 
Rarely is sufficient time allowed for accurate work, the tend- 
ency being to rush it through as one of the burdens and "bug- 
bears" of office detail. Therefore, factory employees who 
may be delegated to this important task do not realize its 
bearing on the financial statements prepared at the end of the 
fiscal period. 

If possible, the work should be done by men who are ex- 
perienced in clerical detail and who also have a knowledge of 
the product, operations, and processes. Where a complete 
cost system is in use, the stock and factory clerks are usually 
qualified by experience and clerical training to take a complete 
physical inventory. The work should be supervised by a 
responsible official, such as the factory superintendent, pro- 
duction manager, head cost accountant, purchasing agent, or 
head stock clerk, who know the value and realizes the impor- 
tance of accuracy. 

In large plants it is well to divide the supervision so that 
each official may be held responsible for different sections of 
the inventory. For example, the head of the purchasing de- 
partment, or head stock-room clerk, may be made responsible 



384 CONTROLLING THE COST RECORDS 

for the raw material items ; the factory superintendent or pro- 
duction manager may be responsible for the finished parts and 
work in process items; the head clerk of the finished stock de- 
partment, or head of the sales department, for the items of 
finished stock ; while the head cost accountant or clerk in 
charge of the cost department may be the supervising authority 
over all, to whom items which are questionable may be re- 
ferred. 

In taking inventory the old-fashioned method of doing 
the actual listing in the factory is found to be impracticable in 
large plants and is becoming more and more obsolete. For 
one reason, items are often overlooked, and for another, when 
the men listing the items are interrupted the tendency is to for- 
get where they left off. As the articles themselves do not 
show any mark, it is often impossible to tell very readily which 
items were listed and which were not listed. 

What is known as the "Inventory Tag Method" does 
away with the drawbacks mentioned, and for this reason has 
become more or less the standardized method in most manufac- 
turing and mercantile industries. The principle of this 
method is that every item to be inventoried must be tagged. 
The tags are simple, containing the information shown in 
Form 97. 

The tags should be numbered in advance and may differ 
in color for use with the different classifications of the inven- 
tory. For example, white tags may be used for raw mate- 
rial stock items, buff for finished stock items, pink for finished 
parts stock items, and green tags for work in process items. 
Or, again, different colored tags may be used for the various 
stock-rooms and operating departments. Where the inven- 
tory is not a large one, little is gained by the use of different 
colors, as all tags are numbered in advance. 

Definite series of numbered tags should be given to the 
persons who are to enter upon them the description of mer- 



METHOD OF TAKING INVENTORY. 



38s 




Form 97. Inventory Tag. (Size, 3 x 4.) 



chandise inventory, and these should be receipted for and a 
record kept at the office as to the person responsible for each 
such series. The quantity of tags given to an individual will, 
of course, depend upon the number or items he has to inven- 
tory, and he may obtain more as required by signing for their 
receipt. 

The men who will do the actual counting and entering 
of the inventory should attach these tags to the various articles. 
All items of stock in all departments, whether finished stock, 
finished parts stock, or work in process, and also each different 
kind of goods composing the raw material inventory should be 
tagged separately in order to arrive at the quantity on hand 
of each particular article or material. 

The tags may be attached in a conspicuous manner to a 
bin, tray, or holder, or tied to an article which forms part of a 



386 CONTROLLING THE COST RECORDS 

bundle or stack of material. After all the items in a particular 
department or stock-room have been tagged and the entries 
made, the inspectors should test some of the items. Under 
some conditions, it may be necessary to recheck and verify the 
entries on the tags of every detailed item. This is especially 
true where the business is being terminated by reason of a 
sale or liquidation. 

After the inspectors are satisfied that all items have been 
properly counted within a particular department, the tags may 
be removed from the stacks of articles, after which operations 
may be resumed, provided these do not interfere with the 
inventory work of any other stock-room or department. 

After the tags are collected, they should be arranged in 
serial number to see that none are missing. If any disappear, 
an inventory may be incomplete as to those items, but with a 
reasonable amount of care missing tags may be reduced to a 
minimum. All tags, including those which may have been 
voided, should be returned to the office, and after all have been 
accounted for, the inventory may be listed. 

Method of Listing the Inventory 

Under some circumstances the tags may contain prices 
and total costs and be kept as a permanent inventory record, 
the listings being done upon add'^ig machine slips. In other 
cases, it is well to provide for a complete listing of the inven- 
tory upon forms similar to Forms 22 (page 94) and 96. 

In listing the items care should be taken to see that the 
description, quantity, and other reference marks are properly 
recorded upon the inventory sheets. It is often well for an- 
other set of clerks to call off the details from the tags and 
verify the information on the sheets. Items of the same kind 
should be grouped together on separate inventory sheets. 

The items of raw material, work in process, finished parts 



METHOD OF TAKING INVENTORY 387 

Stock, and finished stock should all be listed separately so that 
a total may be ascertained for each of these classifications. 
Where there are different kinds of raw material classifications, 
each class should be listed separately, also the work in process 
for each operating department. 

In large plants the listing may be simplified and con- 
siderable time saved by using tabulating machines, which sort, 
group, and total the information upon perforated tags. 

Method of Pricing the Inventory 

The pricing of a merchandise inventory is often compli- 
cated by market conditions and also by the purposes for which 
the inventory is to be used. For example, if a complete inven- 
tory is taken for the purpose of proving the workings of a 
cost system, it may be necessary to price the items at values 
shown by the various cost records. If it is necessary to show 
a conservative valuation at market or cost, whichever is lower, 
two pricings may have to be made, one to prove the results 
of the cost system and another to obtain a statement of financial 
condition and establish a conservative basis for the opening 
inventory of the next period. 

No inventory valuations made expressly for the purpose 
of proving a cost system should be carried upon the records. 
Values must at all times be accurately stated. If prices of 
material and labor decline, it is essential to consider the effect 
of this drop on inventory values regardless of any proof of 
the cost system. Financial statements should be based upon 
facts as nearly as it is possible to ascertain them. Therefore, 
inventory valuations must be stated conservatively when finan- 
cial statements are prepared. It is advisable for a separate set 
of clerks to check the inventory prices. Failing this, at least 
some person in authority who has a definite knowledge of the 
product should review and OK the prices, questioning for the 
9urpose of investigation all items which are doubtful 



388 CONTROLLING THE COST RECORDS 

Pricing Raw Material 

The information for pricing the raw material items may 
be obtained from either the raw stock records, purchase depart- 
ment price records, or market quotations, depending upon 
which is available. If the cost values as shown by the raw 
material stock records are lower than the market quotations, 
either the average cost or the last cost may be used for pricing 
the raw material items. In any event, as already emphasized, 
the cost values should be stated conservatively and if a cost 
value is used, it should always be lower than the market value. 

Pricing Work in Process 

The work in process inventory items are the ones that 
are most difficult to value when complete costs are lacking. 
Often these items are priced at the best guess obtained from 
the estimating cost clerk, sales department, purchase depart- 
ment, or factory foremen. Where a cost system is in opera- 
tion, the cost records should be used as a basis for valuing the 
work in process inventory. Under the order method of cost- 
finding, as all work is done upon some definite order number, 
work in process items may be connected with the particular 
cost sheet of that order. All information as to costs would 
then be obtained from the cost sheets. Where the process 
method of cost-finding is in use, the prices are obtained from 
the average costs, as shown by the detailed cost records of the 
various processes. It is therefore important to consider the 
exact state of all items composing the merchandise inventory, 
and in entering these items the last operation or process which 
they have undergone should be stated. 

The prices for inventorying the work in process are often 
based upon a standard or predetermined cost which may be 
inaccurate. Where the labor costs are standardized, only fluc- 
tuations in the material need be considered. The fluctuations 
are so important that information as to these costs should be 



METHOD OF TAKING INVENTORY 389 

obtained from purchase department records or raw stock 
records if complete records of prices are kept thereon. 

As costs consist of material, labor, and overhead, the 
valuations placed upon work-in-process inventory items must 
also consist of these three elements of cost. For example, if 
a large contract were three-quarters completed, the costs of 
that job would not consist of material and labor alone. Three- 
quarters of the overhead also would have accumulated and 
should be included in the inventory value of the work in 
process. 

Pricing Finished Parts and Finished Stock Items 

The method of pricing the finished parts stock and fin- 
ished stock items should also be considered. Where complete 
costs are kept, the prices for these items may be obtained from 
the various stock records which would show average costs to 
date. In some cases where the stock records do not show 
costs, the information for pricing the finished stock and fin- 
ished parts stock items would be obtained from the cost sheets 
or other cost records. Where no cost system is in operation, 
the costs of finished parts or finished stock are obtained from 
predetermined or estimating cost records. Too often these 
items are guesses which cannot be verified and proved with 
actual facts. 

Whenever finished stock and finished parts stock items are 
priced, consideration must be given to possible fluctuations in 
material and labor costs, while the overhead should be con- 
servatively computed. 

Figuring, Checking, and Proving the Inventory 

In taking inventory the figuring work consists principally 
of multiplications and additions, and in calculating quantities 
and prices care should be exercised not to confuse unit prices 
with prices per dozen, per gross, or whatever the quantity may 



390 CONTROLLING THE COST RECORDS 

be. The various calculating devices, such as adding and multi- 
plying machines, are of great assistance. Also, some concerns 
are organized for the express purpose of calculating inven- 
tories for manufacturers and mercantile businesses. As the 
taking of an inventory entails much additional work, and as 
these concerns place a corps of clerks at the disposal of the 
business which utilizes their services, it is often advisable to 
engage temporary help of this character so as to eliminate 
much of the drudgery and overtime usually necessary. 

Where the pricing and calculating is done directly upon 
inventory sheets (Form 22, page 94, and Form 96, page 380), 
all multiplications and additions should be recalculated. Even 
this, however, does not insure accuracy, as the same errors 
may be made by different clerks. Therefore, as a further safe- 
guard, prices and total amounts may also appear upon the 
inventory tags (Form 97). The comparison of one amount 
with the other insures accuracy. Another method is to have 
two clerks price the inventory without seeing each other's 
figures. To this end two columns are ruled on the inventory 
sheet. After the first calculations are made, one column is 
detached and later compared with the second set of figures 
entered in the second column. If the totals agree, the calcula- 
tions may be taken as accurate. 

Where a cost system is in operation, the merchandise in- 
ventory may be proved with the controlling accounts and sub- 
sidiary ledgers. As the sections of the merchandise inventory 
show the total values of raw material, work in process, finished 
parts stock, and finished stock, these totals may be compared 
with the respective controlling accounts. If the latter, as 
already explained, are subdivided, a proof may be made with 
each classification of the material, work in process, finished 
parts stock and finished stock. In the same way the material, 
labor, and overhead costs of the work in process may be proved 
by means of separate controlling accounts. 



CHAPTER XXIII 

PLANT ASSET RECORDS 

Nature and Valuation of Plant Assets 

In a well-planned cost system it has been seen that the 
cost accounts show a comprehensive analysis of the items com- 
posing the merchandise inventory. A corresponding amount 
of attention should be given to the items composing the plant 
assets, which include assets of a fixed character such as land, 
buildings, and machinery, or those of a more or less portable 
character such as small equipment and tools. All of these 
items are subject to change in character and construction and 
some of them may be transferred to different parts of the 
plant, while some are of a perishable nature and should be con- 
sidered separately. 

When complete records have not been kept which balance 
with the accounts, it is necessary to obtain a valuation of the 
asssets by means of an appraisal. As a rule an appraisal shows 
the sound or depreciated values and reproduction values, and 
if carefully made may serve as a basis for the proper deprecia- 
tion charges. 

The various items composing the plant assets should be 
specified by definite names and symbol numbers. In some 
instances it is well to paint the numbers on the machines, fix- 
tures, and miscellaneous equipment, or a metal tag bearing 
the symbol number may be attached to each piece of equipment. 

Plant Asset Record 

The records which support the asset items may take the 
form of either loose-leaf sheets or cards. Like other ledger 
records, they constitute a subsidiary ledger, the balances of 

391 



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CONTROLLING THE COST RECORDS 



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CONTROLLING THE COST RECORDS 



which should be in agreement with the various controlling ac- 
counts kept upon the general or private ledger. The method of 
filing the sheets or cards would depend upon the classification of 
the equipment and the system of symbols in use. If numbers 
are used as symbols, different series may denote particular 
types of machines in particular departments. These records 
are illustrated in Form 98, which shows the cost value in each 
case and provides spaces for recording the date of acquisition 
and the number and description of each machine. The back 
of the record may be ruled to provide information as to the 
repair and maintenance charges of each machine. 

Purposes of Plant Record 

A comprehensive plant asset record, when properly con- 
trolled, serves the following purposes : 

1. It shows the valuation of each asset, the detailed 

items of which are controlled by the various ac- 
counts in the general or private ledger. 

2. It provides a comprehensive basis for ascertaining 

depreciation rates applicable to definite cost pe- 
riods. 

3. It is valuable as an insurance record for judging 

the amount of insurance which it is necessary to 
carry, and for the purpose of settling disputes in 
case of fire losses. 

4. It provides a system of recording the information 

as to the repairs and maintenance charges. 

5. It serves as a basis for judging the efficiency of a 

particular machine w'hen used in connection with 
production reports for a definite period 

Machines 

Machines may be purchased, or may be constructed at the 
plant. If purchased they should be valued at the total cost to 
deliver, which includes freight and cartage inward. This cost 



PLANT ASSET RECORDS 



395 



may be supplemented by the cost of installing the machine 
ready for operation. 

When a machine is constructed in the plant, the ques- 
tion often arises as to the correct method of estimating its 
value. The construction of special machinery often entails a 
large amount of experimental work, and this obviously forms 
part of its cost. While no item of equipment should ever be 
overvalued, yet the full time and material consumed in its 
manufacture, as well as overhead, should all be considered. 
Often the item of overhead is ignored in a desire to state the 
value of expensive machinery or equipment conservatively. As 
costs consist of material, labor, and overhead, machinery con- 
structed at the plant should be charged with these three ele- 
ments. 

If the construction cost of a machine proves to be ex- 
cessive and it is found that it could be purchased in the open 
maiket at a much lower price, it should not be included among 
the fixed assets at this excessive value. While this v/ould be 
the true cost of the machine, a correct and conservative policy 
of valuation never includes exaggerated asset values. For 
example, in order to find work for the employees of a wood- 
working plant, some desks were constructed during a slack 
period, the costs on which proved to be in excess of the price 
for which the desks could be purchased in the open market. 
When the costs of these desks were ascertained, a portion 
cf these costs should have been charged as a profit and loss 
deduction so that the true value of the desks, included in the 
assets accounts, would not have been overstated. 

The expense of installing machines often constitutes an 
important item of their cost for the reason that special plat- 
forms or foundations may have to be built before the machin- 
ery is ready for operation. Installation costs, therefore, form 
part of the cost of the equipment installed. 

When machines are transferred from one department to 



396 CONTROLLING THE COST RECORDS 

another, values are often destroyed in one place which are 
more than offset by the new value added to the machine set 
up in another place. For example, the old foundation or plat- 
form in the one place may be destroyed, whereas the platform 
used for installing the machine in its new location may cost 
considerably more than the one destroyed. 

To provide for a proper accounting of such a transfer, it 
is necessary to deduct the value destroyed and set up among the 
assets the new cost of installing the machine in the new loca- 
tion. This is often a difificult accounting problem when a whole 
department is transferred and the removal is covered by one 
factory order. If the costs incidental to moving and those re- 
lating to the new construction and equipment are combined or 
compiled together, no basis exists for analyzing the costs so 
that the expense accounts may be properly charged and the 
asset accounts conservatively set up. Therefore, wherever 
possible, a separate order should cover the transfer of each 
machine so that the costs in each case may be kept separate, 
thus furnishing the basis for a complete system of plant asset 
records. 

Tools 

Tools considered as plant assets include large, special, 
and small tools, excepting those which are perishable in char- 
acter. Special tools made for the needs of a plant should be 
closely guarded by complete records. Small manufacturing 
concerns have been known to be wrecked by the theft of their 
special tools. 

A tool room is often the most important stock-room of a 
mechanical plant, and therefore the necessary records should 
be kept to watch closely the tools used in the operating de- 
partments. A simple method applicable to small tools is to 
place them in numbered racks or hang them on numbered 
hooks. When an employee requires a tool, a receipt should 



PLANT ASSET RECORDS 



397 



be obtained. This receipt usually takes the form of the em- 
ployee's tag number, which is hung upon the hook or rack 
from which the tool was taken. When the tool is handed in by 
the employee responsible for its return, his metal tag is handed 
back to him. Like all other stock-rooms, the tool room should 
be under lock and key and in charge of a special clerk who 
should be held responsible for its orderly maintenance and for 
all items lost. 

As it is impracticable to keep an elaborate detailed record 
of the miscellaneous small tools, these items may be grouped 
and recorded upon loose-leaf sheets or cards and controlled 
separately by a general or private ledger account. Large tools 
and all tools of special character should be recorded upon 
separate records similar to Form 98, these containing a com- 
plete description of each tool, covering its cost, repair, and 
depreciation rate. Large and special tools should be treated 
in the same manner as machines and other large items of 
equipment. 

Fixtures 

Plant fixtures, which consist of the benches, desks, racks, 
bins, etc., should be controlled separately and should be desig- 
nated by symbols. The information as to their cost should 
be recorded upon plant asset records, giving a complete de- 
scription of each article. 

Machine Parts 

Miscellaneous large machine parts are often included as 
a portion of the cost of the machine to which they belong. 
Where this is not done, a separate plant asset record should 
be allotted to each machine part similar to the forms used for 
tools and machines. Otherwise, if these parts are not kept 
track of, production may be interfered with by their loss 
when required for use. 



398 CONTROLLING THE COST RECORDS 

Dies, Molds, Etc. 

In many industries, dies, molds, flasks, patterns, and the 
like, form an important part of the plant assets. Many of 
these items are made or purchased for the requirements of 
special orders, and in consequence are often charged directly 
to the cost of the particular job on which they are used. When 
this is not practicable, their cost should be absorbed in the 
overhead by means of depreciation rates. 

Plant asset records should cover the various classifica- 
tions of these items so that depreciation rates may be estab- 
lished and insurance provided for. When these items depre- 
ciate rapidly, they should always be conservatively valued 
in the financial statements. 

Records by Appraisal Companies 

Where complete plant asset records are lacking, an ap- 
praisal is usually made at irregular intervals as a means of 
checking or adjusting the values as shown upon the ledger 
accounts. The first appraisal may be used as a basis for open- 
ing the plant asset accounts. Any important changes in the 
nature and value of equipment may be reported to the ap- 
praisal committee, and in that manner values may be kept up 
to date. 

The changes in the value of equipment may be shown in 
statement form at the end of a cost period, and the manage- 
ment can then decide which items are to be capitalized and 
which are to be charged off against the current operations of 
the business. Often it will be found that additions and de- 
ductions from the established valuations are more closely scru- 
tinized than the original valuations themselves. Under these 
circumstances it is advisable to take an inventory or to make 
an appraisal of the equipment so as to establish a basis for the 
proper accounting of these important items. 



Part V — The Installation of a Cost System 



CHAPTER XXIV 

GENERAL CONSIDERATIONS 

The Cost Accountant 

Cost-finding methods are becoming more and more stand- 
ardized as is indicated by the fact that many of the forms 
required to operate cost systems are sold by stationery houses. 
Notwithstanding the simplification resulting from this stand- 
ardization, cost accountants will always be in demand for the 
reason that the detailed method of procedure in finding costs 
differs in almost every industry and to some extent in almost 
every plant and in consequence must be devised and installed 
by a competent cost accountant thoroughly familiar with the 
principles of cost-finding and the methods of compiling and 
summarizing cost data. 

Among those engaged in cost accounting work, the first 
is the cost accountant engaged in public practice whose place 
in the commercial world is well established. Such an ac- 
countant acts as an independent advisor. His knowledge of 
the subject enables him to adopt a well-defined policy and lay 
out general plans which he knows will achieve the required 
results because they are fundamentally sound and correct and 
are backed by his own personal experiences in the practice of 
cost accounting. As his work to a large extent is supervisory, 
the details of the system may be satisfactorily planned by 
less experienced assistants or accountants engaged in the par- 
ticular industry. The professional man is the teacher who 
lays the foundation for the complete system and procedure. 

399 



400 THE INSTALLATION OF A COST SYSTEM 

The professional cost accountant may be engaged for the 
purpose of devising and instalHng an entirely new cost system, 
or he may be consulted as to the necessity of making certain 
changes in the existing cost system. In either case his work 
is at an end when the system, finally installed, or corrected, 
has proved to be fundamentally sound in its operation. 

The second, and equally important, type of cost account- 
ant is the man who is employed by a concern as a permanent 
member of the organization. He devotes his whole time and 
ability to the cost problems of his concern and is held respon- 
sible for the successful operation of the cost system as a whole. 

Work of the Cost Accountant 

Most of the large enterprises of today are provided with 
cost systems. These enterprises are, however, constantly 
growing and developing, new lines of merchandise are being 
added, and new manufacturing methods installed. This means 
that their cost systems must be adapted to these changing 
conditions. New methods of compiling cost may need to be 
devised, existing methods must be modified, and perhaps me- 
chanical ofifice appliances may be advantageously used to elimi- 
nate detail work in cost compilations. 

The cost accountant must know all the "best" ways of 
reaching these ends. Therefore, if he is to operate the cost 
system successfully he should understand the fundamental prin- 
ciples of cost-finding, and be able to revise and remodel his 
cost system when changes in manufacturing conditions make 
such alterations necessary. 

Cost Classification of Enterprises 

Most writers on accounting attempt to classify the vari- 
ous enterprises from an accounting standpoint, and some 
of these classifications are given here. The enterprises hsted 
are divided into two groups, the first containing those classes 



GENERAL CONSIDERATIONS 401 

to which cost accounting systems are not applicable, the sec- 
ond covering industries in which cost accounting may be prof- 
itably employed. The first group includes the following classes : 

1. Financial 

2. Insurance 

3. Professional 

While ordinarily no cost systems are operated in connection 
with any of these enterprises, it is true that some dentists, 
doctors, and accountants keep cost records of a simple kind. 
The second group in which a cost system, either in whole 
or in part, may enter into and form part of the accounting 
methods and system of each enterprise, includes : 

1. Trading or mercantile businesses, such as retail, job- 

bing," and wholesale houses. In this class of busi- 
ness, costs are ascertained by departments. To 
do this it is necessary to keep complete stock 
records showing the money values of stock on 
hand, and also records showing the cost of the 
sales. This gives a basis for preparing periodical 
financial statements during the fiscal year. 

2. Manufacturing industries, such as : 

(a) Metal-working plants 

(b) Wood-working plants 

(c) Textile plants 

(d) Paper mills 

(e) Chemical works 

(f) Paint and varnish plants 

(g) Boot and shoe factories 
(h) Garment factories 

(i) Shipbuilding plants 

(j) Garages, machine shops, and repair shops 

3. Mining industries, such as coal, copper, silver, and 

gold mining. 



40J THE IXSTALLATION OF A COST SYSTEM 

4. Public Utilities, such as railways, street railroads, 

electric light, gas, and water companies. 

5. Governmental systems, which include the national 

government, and the various state, county, and 
municipality governments, with the various de- 
partments of each, such as the water supply de- 
partment, police department, fire department, de' 
partment of health, street cleaning department, etc. 

6. Public and private institutions, such as colleges and 

schools, sanitariums, asylums, and hospitals. The 
management of these institutions usually requires 
some cost information to present to the board of 
directors or trustees as a gage of the efficiency of 
the management. 

7. Miscellaneous enterprises, such as clubs, hotels, res- 

taurants, building and trade contracting, breweries, 
real estate, and land development companies. 

Internal Problems Affecting Cost Installations 

Often the conditions existing in an industry have an 
important bearing on the devising and installation of cost sys- 
tems. Not the least among these is the disposition of the 
manufacturer himself and his organization towards the cost 
system. It is absolutely useless to try to devise and install a 
cost system if it is going to be regarded with suspicion and 
criticism by those who are to operate and use it, before it 
has had a chance to prove its worth. To get the best results, 
the co-operation of the management and the entire organization 
is needed. One of the reasons for the failure of many cost 
systems is due to the lack of this co-operation. 

To avoid executive opposition, before devising or in- 
stalling a cost system the requirements of the management 
should be ascertained, and their desires be fulfilled so far as 
possible. 



GENERAL CONSIDERATIONS 



403 



Among the working force the foremen and various de- 
partment heads are often the most persistent objectors to a 
cost system, as they are Hkely to regard its installation as an 
invasion of their territory. They are right to the extent that 
the system provides an effective means of checking their work 
and measuring their efficiency in a way that cannot be done 
by personal inspection. 

The most common shortcomings of a foreman are found 
in his failure to plan ahead properly and lay out work for the 
men under him, and the time and labor reports will often 
show his deficiencies in this respect. To illustrate, the time 
clock cards may show that the men were present 900 hours 
during a week, while the labor reports, which show the time 
spent on productive jobs, record but 800 hours for the same 
week. The discrepancy disclosed by this cross-checking of 
labor records is up to the foreman to explain. The objec- 
tions of the foremen and the men may perhaps be overcome 
on the lines of the general basis of the general benefit of the 
system and its absolute fairness to them. 

At times the accountant or accountants employed per- 
manently by a particular industry who have established cost 
systems in their plant, feel that a new system, or suggested 
changes in a system, are within the scope of their individual 
work, and resent any suggestion from outside professional 
accountants which they themselves have not already consid- 
ered. Since any changes in the cost department directly af- 
fect the work of the cost clerks and largely depend upon their 
co-operation for success, it is most essential to secure their 
good-will. A good plan, where possible, is to allow the cost^ 
clerks to suggest methods and changes. Credit for such sug- 
gestions, given where due, often aids materially in the suc- 
cessful operation of a cost system. 

The good-will of the estimating department must also be 
secured, if possible. A cost system, if it operates properly, 



404 



THE INSTALLATION OF A COST SYSTEM 



provides an effective means for checking up the work of this 
department. 

The sales department may object to the installation of a 
cost system if it involves changes in the method of pricing. 
Old-fashioned employees cannot get used to a new method of 
figuring costs as a basis for making a selling price. Often 
it will be advisable to allow the sales department to figure prices 
in both the old and the new way until the new methods prove 
their greater accuracy and value. 

Fitting the Cost System to Existing Conditions 

A special cost clerk is desirable when a cost system is to 
be installed. If the work is to be undertaken by the regular 
office force the system must be one they can handle, and when 
the clerical force lacks experience in such work, this necessi- 
tates a very simple system. More will be accomplished by 
generalizing results in such cases than by putting in a complete 
system, which is bound to break down because the clerical force 
cannot handle it. In other words, the cost accountant must 
work along the lines of least resistance and begin with as 
simple a system as possible, amplifying this and adding new 
features as the conditions allow. 

Under such conditions it may be wise to Introduce at 
first an "Estimating System," which is one of the simplest 
systems but one which will serve its own purpose and also soon 
show where more complete methods should be applied. The 
size of the plant and complexity of the work will, of course, 
have some influence on the system, both in the beginning and 
during its growth. It cannot be expected that an elementary 
installation will give satisfactory results where there are many 
varieties of articles manufactured, or where the processes are 
numerous or involved. 

The growth of a system is not necessarily toward com- 
plexity. Very often, after a factory is well organized and 



GENERAL CONSIDERATIONS 405 

the efficiency work of the cost system is beginning to show 
results, features that were at first treated separately may be 
included in larger units and much detail labor avoided. The 
system at first must fit existing conditions; but one of the 
objects in view is to change conditions for the better, and 
when this is done the system itself may also be changed. Also, 
in some cases there are results that remain comparatively con- 
stant from year to year; and when the cost system has estab- 
lished the stability of these results by detailed methods for 
one or two years, the part of the system by which this has 
been done may be dropped and the results considered as a 
constant quantity. There is little benefit in verifying estab- 
lished data, especially if the verification is involved or expen- 
sive, or can be accomplished approximately by other means. 

Red Tape 

Whatever kind of system is devised, every precaution 
should be taken to avoid making it top-heavy. If there is one 
thing more than another that excites criticism of a cost system, 
it is red tape that does not justify itself in practical results. 
It sometimes shows itself in a mass of undigested reports, trou- 
blesome to make up in the shop and impracticable to use in 
the office, or it may take the form of volumes of data that no 
one ever consults. Another form of red tape, not uncommon, 
carries small items of cost to such a degree that the process 
of determining these costs is more expensive than the costs 
themselves. 

In avoiding these pitfalls the cost expert will sometimes 
appear to be violating the fundamental principles of cost-find- 
ing, when as a matter of fact he is only preventing them from 
going to seed. 

Reports for Executives 

The systematizer must constantly keep in mind the prac- 
tical objects and purposes of the cost system. The system it- 



4o6 THE INSTALLATION OF A COST SYSTEM 

self is not the result ; it is only the means by which results are 
obtained and these results must be adequately reported. 

If the cost system is to measure shop efficiency, the records 
that will show these final results are the comparative analytical 
statements prepared at the end of every cost period. The ef- 
ficiency comparison may be made by parallel columns or by 
comparing different sheets. Sometimes the various expenses 
are plotted on charts so as to show at a glance the upward or 
downward tendency. 

The completeness of the expense classification depends 
upon the completeness of the system, and as stated before, this 
depends upon a number of considerations. In a thoroughly 
effective system the manager should be able to put his finger 
on any variation in any item of expense relating to any class 
of goods or to any department, and either know the cause of 
such variation or be able to investigate and discover it. Not 
only can variations be studied, but each item may be consid- 
ered by itself with the idea of applying a remedy if needed. 
In short, an adequate series of reports of cost results serves 
as the key to the whole manufacturing situation, giving the 
management positive knowledge of the facts as they exist. 

Summary of Cost Procedure 

The summary of procedure in operating a cost system 
may be concretely presented as follows : 

1. Charging the factory. 

2. Receiving and storing material. 

3. Proving and charging pay-rolls. 

4. Delivering material to operation. 

5. Compiling costs. 

6. Crediting production. 

7. Distributing factory overhead. 

8. Charging production to stock. 

9. Costing sales and shipments. 



GENERAL CONSIDERATIONS 407 

10. Preparing and posting the summarizing records. 

11. Proving subsidiary records. 

12. Preparing and proving the trial balance. 

13. Preparing factory and financial statements. 

1. Charging the Factory 

The factory is charged with its material, and the labor 
and overhead involved in securing and storing this material 
and transforming it into finished goods. The material charges 
are obtained from the invoices and analysis of purchases rec- 
ord, or from the accounts payable vouchers and voucher reg- 
ister together with the distribution record or analysis record. 
The labor charges are obtained from the voucher register, 
supported by an accounts payable voucher, or. from the pay- 
roll analysis. The overhead charges are obtained from the 
invoices, together with the purchase record or accounts payable 
vouchers and voucher register, supplemented by the distribu- 
tion record or analysis record. These records should be sup- 
ported by the detailed purchase requisitions, purchase orders, 
and report of materials and supplies received. 

2. Receiving and Storing Material 

The material is to be stored in the various storerooms 
and operating departments, and its quantity and value is re- 
corded upon raw materials stores ledger accounts. The entries 
for this record are obtained from the invoices, supported by 
the report of material received, purchase order, and purchase 
requisition. A summary of material received may be prepared 
presenting the information in form for posting to stores ledger 
accounts. 

3. Proving and Charging Pay-Rolls 

Pay-roll records for paying employees are prepared from 
time reports and miscellaneous labor reports; and an analy- 



4o8 THE INSTALLATION OF A COST SYSTEM 

sis of the pay-roll is prepared from the same detailed reports 
and proved to ascertain the departmental charges. 

4. Delivering Material to Operation 

Information as to transfers of material from stock and 
from miscellaneous storerooms to operation are obtained from 
material requisitions, departmental material records, stock 
transfer records, and miscellaneous material reports, these de- 
tailed reports being posted to the detailed stores ledger ac- 
counts. The same information is posted to the detailed cost 
sheets and miscellaneous cost records, including process cost 
records. 

5. Compiling Costs 

The compilation of costs includes the posting of material 
and labor reports, the details of which are transferred to the 
cost sheets or other cost records, including process cost records. 

Provision must also be made for the departmental over- 
head affecting the various jobs, orders, or articles, and the 
overhead should be recorded upon the detailed cost sheets or 
other cost records. The compilation made upon these cost 
sheets and records, and the total cost of the job, order, or ar- 
ticle should be thoroughly checked and compared with pre- 
determined, estimated, standard, or previous cost. 

6. Crediting Production 

Provision should be made for summari2ing the production 
and crediting the factory, at the same time distinguishing be- 
tween good and defective work. Defective work, repair 
orders, and production orders should all be summarized. The 
detailed information for preparing the production summary 
is obtained from the miscellaneous production reports and the 
cost information from the cost sheets or miscellaneous cost 
records. 



GENERAL CONSIDERATIONS 409 

7. Distributing Factory Overhead 

Items of overhead should be charged to departments. 
Non-productive departmental overhead and general operating 
expenses should be absorbed in the productive departmental 
overhead rates so that the overhead may be applied to the 
various jobs, orders, articles, or processes. 

8. Charging Production to Stock 

Provision should be made for summarizing the informa- 
tion in regard to production so that the charges to the various 
stock-rooms may be ascertained. The information for pre- 
paring these summaries is obtained from the production re- 
ports, the supporting cost sheets, and other cost records. The 
detailed items should be posted to the raw material, finished- 
parts stock, and finished stock stores ledger accounts accord- 
ing to the destination of the product. 

9. Costing Sales and Shipments 

The shipping orders and supporting invoices to customers 
should be costed and a summary prepared from these detailed 
reports. The returned merchandise received from customers 
should also be separately costed and summarized. This cost 
information may be obtained from the various stock records, 
cost sheets, or cost records. The merchandise shipped on con- 
signment, and merchandise consigned and returned, should be 
treated upon separate records. 

10. Preparing and Posting the Summarizing Records 

All charges to the factory, transfers of material, labor, 
overhead items, and credits to departments, should be listed 
for the purpose of obtaining the totals to be posted to ledger 
accounts. The entries to the ledger accounts may be made di- 
rectly from these summarizing records to the general or fac- 
tory ledger, depending upon the method of control. 



410 



THE INSTALLATION OF A COST SYSTEM 



11. Proving Subsidiary Records 

The various subsidiary records should be proved with the 
controlHng raw material, work in process, part-finished, and 
finished stock accounts. A proof should then be made with 
the controlling accounts as kept in the general ledger, if a 
separate subsidiary factory ledger is kept. 

If the stock records show perpetual inventories, provision 
should be made for testing every item of the different classi- 
fications of the merchandise inventory at least once during a 
fiscal year. 

12. Preparing and Proving the Trial Balance 

The trial balance of the factory ledger and general ledger 
may now be prepared, and all accounts should be in agreement 
with the various subsidiary records. 

13. Preparing Factory and Financial Statements 

The preparation of statements includes such financial 
and factory statements as the management desires. These may 
be supported by schedules when it is necessary to show more 
detail. Any special kind of statement desired may be prepared 
if the cost system shows a complete history of all factory 
transactions. 

Cost Systems 

Cost systems are of two kinds: 

1. Estimated or predetermined systems 

2. Complete cost systems according to the order method 

or process method of cost-finding 

Predetermined costs are based upon estimated or stand- 
ardized cost information obtained by means of fixed rates or 
percentages, or by means of complete standardized cost rec- 
ords showing the totals of the material, labor, and overhead 
costs. 



GENERAL CONSIDERATIONS 



411 



Actual cost systems comprise job, order, and process cost 
systems. In some cases the last two methods may be combined. 
In other cases all three methods may be used in the same plant. 

An examination of the plant should be made for the pur- 
pose of ascertaining the requirements and the system or meth- 
ods of procedure to be used. 

Forms for Cost Records and Reports 

When it comes to the question of choosing or designing 
the forms to be used in any particular case, it is impossible 
to exercise too great care and foresight. The matter is one 
ihat cuts deeper than is apparent at the first glance. Funda- 
i.ientally, a form is determined by the question, "What do I 
want to know?" Not only the form but the system to be 
adopted depends on the answer to this question. The next 
question is, "How can the facts best be obtained, summarized, 
and arranged, so as to get the most out of them with the least 
trouble and expense?" This cannot be answered until the 
type of system to be installed has been decided upon. 

Any cost system should be so arranged that its several 
parts will fit into the scheme naturally and conveniently. Spe- 
cial forms need not be provided in all cases for summarizing 
purposes; in many cases summarizations may be made upon 
the same form on which the original data is compiled, and 
where this is not practicable, standardized columnar-ruled pa- 
per may answer the purpose. The forms for gathering the 
data at first hand should be designed with the idea of getting 
the necessary information accurately but with the least dis- 
turbance to the workmen and to shop routine. 

Forms, as intimated, may be so arranged that they may 
be used for more than one purpose. This double purpose is 
accomplished either by making the form more general or in- 
clusive in design, or by making extra copies. In actual prac- 
tice, while the same forms may be used for different purposes 



412 THE INSTALLATION OF A COST SYSTEM 

the same data should not he collected over and over again 
The forms as shown in the present volume sometimes overlap 
but this is because it is necessary to show what uses can be 
made of each form — not what uses should be made. 

The forms submitted are limited in numl)er and have been 
carefully selected rather as suggestions to work from than as 
examples from which to choose. The forms are not all shown 
with provision for binding but this can be easily supplied when 
necessary. Forms are most securely preserved if bound in a 
loose-leaf binder. 

A careful inspection and comparison of related forms will 
often suggest minor changes that wnll adapt them to other sys- 
tems. Adding a new column or changing the classifications 
w'ill often enlarge the scope of a form more than w^ould seem 
possible. No attempt has been made to explain all the func- 
tions that each design may perform, the object being to cover 
only its main functions. 

Presenting Report on Cost Systems 

If the services of a professional cost accountant are en- 
gaged to devise a new cost accounting system or a modifica- 
tion of an existing system, he should be asked to present a 
report containing the following information : 

1. A general statement as to the purpose and scope of 

the new system, or reasons for changes in the ex- 
isting system, together with the advantages and 
arguments in favor of the new methods as com- 
pared with the old methods. 

2. An explanation in detail of all new forms, summar- 

izing records, ledgers, and ledger accounts re- 
quired. Instructions should be given as to the 
reasons for and methods of recording the cost 
data required and as to its disposition in each case. 
It should be stated by whom each record is to be 



GENERAL CONSIDERATIONS 



413 



prepared and how it is to be handled, and finally, 
how the cost information is to be filed. 
3. The forms to be used, drawn in their actual working 
size and presented in logical order, with their 
proper rulings and headings inserted. 

It may be emphasized that the report should definitely 
describe the duties of each cost and factory clerk under the 
new system and the method of doing each portion of their 
work. Also, it is often advisable to submit a schedule showing 
the dates when the various summarizing records and reports 
to the executives and department heads should be ready. 
Such a schedule serves as a record for judging the efficiency 
of the members of the cost department, as it places the respon- 
sibility for preparing each summarizing record and report 
upon a particular individual. 

After the above information has been presented and those 
interested have had time to give it thorough consideration, a 
conference should be held so that additional information may 
be given or any points which are not sufficiently clear in the 
original report may be elaborated., Any differences of opinion 
should be satisfactorily adjusted before the installation of a 
new system if any changes are made in an existing system. 



CHAPTER XXV 

INSTALLING A COST SYSTEM— EXAMINATION OF 

PLANT 

Nature of Examination 

The basis of any successful cost system must be sought 
in the manufacturing operations. This presupposes a physical 
examination of the plant in which a cost system is to be in- 
stalled. It is not enough to inspect the books, as an analysis 
of the accounts and records cannot furnish all the necessary 
data. The extent and character of the information required is 
limited only by the boundaries of the business, and the classi- 
fication of this information is a matter of the highest im- 
portance to the systematizer. He should have a definite plan 
of procedure and each question he may ask should have its 
definite place and object. In other words, the examination 
should be systematic and thorough. 

The character of the information desired determines the 
scope of the examination. If a complete cost system is to be 
devised and installed the examination of the plant must ob- 
viously be more searching than if the cost accountant is merely 
to make suggestions for the improvement of existing cost- 
finding methods. However, it is always advisable to make 
a fairly thorough examination. Suggestions made after a 
partial or superficial examination are often found to be im- 
practical because peculiarities of the particular industry which 
modify its cost accounting requirements have not been dis- 
covered. 

The usual method of making an examination of a manu- 
facturing plant for cost accounting purposes is to begin with 

414 



EXAMINATION OF PLANT 



415 



the receiving department, where the raw materials and sup- 
plies are received, and end with the office records. The cost 
accountant in charge should follow step by step from the re- 
ceipt of raw material through each process of manufacture 
to the finished product, studying the method of storing the 
product at each point where a storeroom enters into the regu- 
lar operation. The auxiliary activities of the plant, as they 
arise in connection with the manufacturing operations, must 
also be studied. Circumstances in each particular case will 
determine just where in the investigation the various pro- 
ductive and non-productive departments and storerooms should 
be considered. 

The general method of cost-finding required in any par- 
ticular plant will be suggested by the nature of the product 
and processes and one of the first steps must be to see that the 
lines are properly drawn between processes so as to provide 
for a working system of operating departments. 

Examination of an Existing Cost System 

In modifying or replacing an existing cost system the fol- 
lowing matters must be considered : 

1. Product classification. 

2. Departments of the factory and the manufacturing 

processes in these departments. 

3. Factory orders and method of starting the work in 

the various departments of the plant. 

4. Raw material and storeroom requirements and the 

detailed material reports in use. 

5. Labor and labor reports in use. 

6. Departmental application of overhead items and the 

general distribution of the factory overhead, in- 
cluding reports which are necessary for recording 
this information. 

7. Method of reporting production and the reports used. 



4i6 THE INSTALLATION OF A COST SYSTEM 

8. Storeroom requirements for finished stock, finished 

parts stock, and reports incidental thereto. 

9. Method of compihng the detailed costs, supplemented 

by a study of the cost sheets and other cost records. 

10. Cost summarizing records, supplemented by a study 

of the methods by which the information is ob- 
tained for entry upon the various accounts af- 
fected. 

11. The general accounting records which are used for 

the purpose of making the original entries. 

12. The general accounting system in use, giving partic- 

ular attention to the factory accounts. 

13. The statements to be prepared, the general method 

of presenting them, and the results obtained by 
their preparation. 

A general outline embodying much of the required in- 
formation may be made at the first conference with the man- 
agement and before the examiner inspects the factory depart- 
ments. While the examination is being made, the examiner 
should consider the place of each feature in the cost system 
and what special modifications are needed to make the system 
fit the conditions as they exist. He must at all times watch 
for any other data that may help him in suggesting changes 
in the system, and note carefully any defects and inefficien- 
cies disclosed by his examination. 

It must not be thought, however, that the examination it- 
self will discover anything more than "surface" defects; it 
remains for the modified cost system, when it is finally in- 
stalled, to detect and locate all inefificiencies which lie beneath 
the surface. 

Also a watch should be kept for leaks, especially in places 
where they may exist unnoticed. Lost or spoiled material and 
idle time are among the more prominent and more costly 
leaks. Large losses are sometimes incurred by the failure to 



EXAMINATION OF PLANT 417 

completely check material received, as in cases where barrels 
are not opened to see that they are full. Spoiled material is 
likely to be concealed if the method of reporting production 
is not good. Time may be lost through poor management on 
the part of foremen, especially where the departments are not 
well balanced and where the men in one department wait for 
work from another department. 

Time lost in carrying materials, crowding of aisles with 
goods, scattering of men's time on odd jobs, unnecessary con- 
sumption of power, waste of scrap material, inconvenience in 
location of tools and dies, poor wash-room and toilet facili- 
ties, are all items that should receive attention, as losses are 
often incurred which, although small in any special case, 
are considerable when spread over the whole factory. 

The examiner should also take note of all places where 
the work seems to be going on in a half-hearted manner. 
Such work will require attention, and perhaps special meas- 
ures, but the better results secured will well justify it. Mat- 
ters of heat, light, and ventilation are most important; bad 
air makes the men dull and listless, and often causes the pro- 
duction of an entire department to drag. 

Efficiency Details 

In any examination in addition to collecting constructive 
information for the purposes of his installation, the cost ac- 
countant should constantly watch for possibilities of increas- 
ing efficiency. These might include such things as the im- 
provement of wage systems; improvement in arrangement of 
the plant; improvements in the routine manner of handling 
machines ; removal of congestions in the various departments ; 
improvements in the method of storing raw materials, supplies, 
and various items composing finished stock ; suggestions as to 
the method of handling tool room records; suggestions as to 
plant asset records. 



4i8 THE INSTALLATION OF A COST SYSTEM 

Procedure for Examination of a Plant 

It is suggested that the cost accountant examining a plant 
have with him a schedule of procedure which will enable him 
to classify his information and keep him from overlooking im- 
portant details. The suggestions which follow, while suitable 
for this purpose, are not expected to cover every possible 
condition. The examiner in charge will be able, however, in 
any case to cover a large portion of his investigation by using 
these queries and suggestions and may supplement them with 
additional information whenever necessary. It is impossible 
to obtain information in too great detail. 

I. Product Classification 

The catalogue and other advertising literature published 
by the company, including circulars of a descriptive character, 
often furnish the basis for a complete product classification. 
Additional information may be obtained from the sales rec- 
ords or any finished stock records which may be kept. If 
product classifications are lacking, the following procedure will 
supply the deficiency : 

(i) Obtain description of all product sold, whether 
manufactured or purchased to be sold in its orig- 
inal state. (A distinction should be made be- 
tween product manufactured and product upon 
which no manufacturing operations are done. ) 

(2) Supply or suggest headings for the main divisions 

of the product manufactured. 

(3) Supply or suggest subdivisions which may be used 

under each of the main divisions if a more de- 
tailed product classification is desired'. 

(4) Obtain views of the executives of the sales depart- 

ment, purchasing department, accounting depart- 
ment, and production manager, on the product 
classification which is contemplated. 



l^XAMINATION OF PLANT 



419 



Obtain catalogue if one is in use. 

Any additional information that may be helpful. 



2. Sales Department 

1 ) Ascertain manner of selling product. 

2) Ascertain amount of sales annually. 

3) Are sales evenly distributed over the year, or are 
they seasonal? If so, why? 

4) Are sales classified, and if so, how? 

5) Are any branch warehouses, offices, or agencies 
maintained? If so, how handled? 

6) Any mail order business? If any, under what 
plan ? 

7) Any retail department? How handled? 

8) How many salesmen employed — on salary or com- 
mission? 

9) Any records of salesmen by territory? 

(10) Any records of profits on sales of each man as 

above ? 

(11) Any statistics as to sales and salesmen ; are they 

compiled regularly or only at intervals? 

(12) Any advertising plan? Obtain description of it 

and the records kept. 

(13) Obtain description of follow-up system, if any. 

(14) Obtain description of filing system. 

(15) Obtain description of freight rate records, if any. 

(16) Obtain list of office force and duties of each. 

(17) Obtain copies of all forms or books, including route 

lists, salesmen's reports, expense accounts, quo- 
tation records. 

(18) Any additional information. 

3. Departments of the Factory and Manufacturing Processes 

The underlying purpose of an organization is to bring 
each and every activity of the plant under the notice and con- 



420 



THE INSTALLATION OF A COST SYSTEM 



trol of the men responsible for its proper operation. Thu?», 
each department should be considered in its relation to the 
preceding and succeeding departments, and the methods by 
which its operations and production are reported and con- 
trolled should be carefully studied. 

As far as possible, each productive department should be 
limited to single operations in order to provide an intelligent 
basis for compiling the costs. The information relative to 
the machinery should include cost, floor space, and in fact all 
data necessary for the calculation of assignable factory over- 
head items. In considering the distribution of the power cost 
item, it should be determined whether tests for power have 
ever been made and if so whether the conditions make it de- 
sirable for the tests to be brought up to date. 

The general arrangement of the departments and the ma- 
chinery should be examined very closely with the idea of mak- 
ing all processes as continuous as possible. ]\Iuch time and 
money are wasted in rehandling material when machines are 
badly placed in regard to each other. 

The average and minimum efficiency of the machines 
should be ascertained, and whether they are automatic or other- 
wise. This latter point is often important in arranging de- 
tails for gathering and compiling costs. If a machine rate 
is to be used, the examination should be unusually detailed 
and thorough. 

All manufacturing processes and operations should be 
specifically designated. If the names of the operations are 
not definite enough in themselves to suggest the exact nature 
of the manufacturing process, a detailed description of the 
process or operation should supplement each name. 

A request for the following data will furnish detailed 
information as to the operating conditions in the plant : 

(i) How many plants are in operation and where are 
they located? Obtain description of them. 



EXAMINATION OF PLANT 421 

(2) Are any other plants controlled by this concern? 

(3) If possible, obtain sketch of floor space of plant 

and indicate space occupied by each department. 
Obtain blue-print if it may be had. 
'(4) Obtain land area and ascertain how it is occupied. 

(5) Is plant owned or rented? 

(6) Could plant be improved as to arrangement without 

any material expense ? 

(7) Ascertain whether a maintenance record is kept for 

buildings, machinery, and equipment, and if so, 
obtain detailed explanation of the method of keep- 
ing and using the record. 

(8) Get name of each department. 

(9) Get name of the foreman or supervising head of 

each department. 

(10) Ascertain number of employees, classified as to pro- 

ductive and non-productive workers. 

(11) Ascertain method of paying wages, classifying 

piece-workers, day-workers, bonus-workers, pre- 
mium-workers, etc. 

(12) Does the foreman appear to be competent? What 

are the duties of his assistants and of the depart- 
ment clerks? 

(13) Are instructions given to the department employ- 

ees verbally or in writing? 

(14) Are blue-prints, drawings, models, and sketches 

furnished in all cases where desired? 

(15) Obtain list of machines in the departments and the 

different processes and labor operations in use. 

(16) Where the name of the machine does not clearly 

indicate its purpose, obtain description. Also as- 
certain which are automatic or semi-automatic, 
and get description of groups when they are op- 
erated by one person or a team. 



4-^2 



THH IXSTALLATION OF A COST SYSTEM 



(17 
(18 

(19 
(20 

(21 

(22 



(23 
(24 



(25 

(26 

(27 

(28 
(29 

(30 

^31 



Obtain complete description of any machines which 
are obsolete or inefficient. 

Are machines arranged to the best advantage for 
economical operation? Suggest improvements. 

Are there high-speed machines or tools used? If 
so, obtain description. 

Are the machines operated as rated by the makers 
or have any attempts been made to increase their 
efficiency ? 

Are there any counters upon any of the machines? 
If so, on which? On what other machines might 
counters be useful? 

If tempering or heating or drying furnaces are in 
use, ascertain their purpose and obtain full de- 
scription. Also ascertain kind of fuel used, and 
any items of cost peculiar to each furnace. 

Are all machines numbered? 

Is there a separate tool room, and how are tools 
obtained and followed when they are used by 
different employees? 

What is method of numbering and cataloguing 
tools ? 

Do workmen keep own tools in repair, or is there 
a toolmaker employed for that purpose? 

Are machines and transmission appliances guarded 
to protect employees against accident? 

Are there any tool or pattern maintenance records? 

Are there any efficiency records in connection with 
either men or machines? 

What sort of power is employed, and how distrib- 
uted; i.e.. by individual motors, group motors, a 
single motor, or direct from line shaft? 

Is there any record of power cost either for de- 
partments as a whole, or as applied to machines? 



EXAMINATION OF PLANT 



423 



[^2) Is natural lighting good? If deficient, why? It 
possible, suggest improvements. 

(^T)) Obtain complete list of operations performed in 
each department, indicating hand and machine 
work; also descriptions of any that are excep- 
tional and peculiar. 

(34) Are operations standardized as to time, machines, 

speed, tools, etc. ? 

(35) ^^^ there any defective methods of performing op- 

erations? Suggest improvements, if possible. 
(S^) Obtain description of time-keeping system and 

method of reporting labor cost information. 
(t,7) Is there any lost or idle time? If so, why? 

(38) Obtain description of bonus or premium system in 

force. 

(39) How are materials obtained and charged to pro- 

duction ? 

(40) Is it necessary to issue materials in excess of im- 

mediate requirements at times? If so, how is the 
excess cared for? 

(41) How is defective work reported and disposed of? 

(42) Are there any methods to check the replacing of 

materials that have been spoiled ? 

(43) Do requisitions for replaced material indicate the 

purpose of the withdrawal? 

(44) Is there any undue waste of material or time? If 

so, suggest remedy. 

(45) How is legitimate waste material disposed of? If 

used again, how? 

(46) Is all work properly tested or inspected? 

(47) Is work inspected by operation, or only when en- 

tirely completed? 

(48) Are there any delays in departments due to faults 

of other departments? If so, what are they? 



424 THE INSTALLATION OF A COST SYSTEM 

(49) Is any attempt made to regulate the degree of hu- 

midity in departments? How are they venti- 
lated ? 

(50) If manner of reporting production or progress in 

any one department differs in any way from 
others, ascertain the difference. If production is 
checked, learn method in use. 

(51) How are parts belonging to repair jobs stored and 

marked ? 

(52) Are any samples made for showrooms, demonstra- 

tion, or salesmen? If so, how handled as to 
accounting? 

(53) Is there any friction or dissatisfaction of any sort? 

If so, what is it? 

(54) Do the departments appear to be efficient as a whole, 

or is there an indication of laxity ? 

(55) Obtain copies of all forms. 

(56) Any additional information. 

The above information should be obtained for each de- 
partment of the plant so far as the suggestions apply. Any 
additional data which is necessary to cover peculiar require- 
ments incidental to a special department or plant should be ob- 
tained. Some of the special departments which should receive 
particular attention are mentioned in the paragraphs which 
follow. 

4. Foundry Department 

In the case of the foundry department, the same inquiries 
as used for manufacturing departments may be applied so far 
as they will fit. In addition the various classes of molding 
should be ascertained, viz., machine, snap, floor, pit, regular 
bench, etc., as well as the different classes of output, the char- 
acter of mixtures, and other information, as follows: 



EXAMINATION OF PLANT 425 

( 1 ) Do mixtures vary in the same melt ? 

(2) What is number of melts per week? 

(3) What is cleaning process? 

(4) What is manner of making calculations at present? 

(5) W^hat is manner of ascertaining production and 

waste ? 

(6) Is work planned in advance? 

(7) Are flasks, rigging, and tools cared for and placed 

conveniently for use? 

(8) Are iron or wooden flasks used? 

(9) Are there any special methods of molding? 

(10) What is condition of cupolas, furnaces, or other 
equipment, etc. ? 

5. Plating Room 

The same inquiries as for manufacturing departments may 
be used for the plating room, wherever applicable. Informa- 
tion should be obtained as to whether anodes or salts are used, 
and how consumption and amount of deposit is ascertained. 
Any special processes should be noted, and also the number 
of small pieces immersed in one hangar, the difficulties, etc. 

6. Wood-working Shops 

In wood-working shops the line of investigation outlined 
for manufacturing departments should be pursued, bearing 
in mind that wastes and consumption of material are the most 
puzzling features of such plants. Information should be ob- 
tained particularly from an accounting standpoint as to the 
methods employed for determining consumption of materials 
and the treatment of wastes suitable for further use.' 

7. Dry Kilns 

(i) What is type of kilns used; that is, direct heat or 

vapor process? 
(2) W^hat is equipment and manner of operating? 



426 THE INSTALLATION OF A COST SYSTEM 

(3) Is exhaust steam or live steam used? 

(4) Is luml:>er measured or weighed in and out? li 

not, how is quantity dried accounted for? 

(5) Obtain information as to special fire protection, if 

any. 

(6) How far away from factory buildings are dry kilns 

located? 

(7) Is any attempt made to record cost of drying? If 

so, obtain particulars. 

(8) Ascertain number of employees and their duties. 

(9) Obtain copies of all records. 

(10) Any additional information. 

3. Power Department 

( 1 ) Obtain list of equipment fully described as to kind 

and capacity of engines, boilers, dynamos, pumps, 
heaters, condensers, etc., as well as to the condi- 
tion of the equipment. 

(2) How frequently are boilers cleaned? 

(3) Is there any reserve capacity? 

(4) Is equipment deficient in any respect? If so, how? 

(5) Are there special safeguards against accidents? 

(6) Is power plant in one unit? If more than one unit, 

obtain description of each unit separately. 

(7) Are all buildings heated from the central power 

plant ? 

(8) Obtain description of the records showing power 

and heat distribution. 

(9) Obtain description of records which show the dis- 

tribution of light, 
do) Obtain description of any record which may be kept 
for air distribution. 

(11) Obtain description of any records which may' be 

kept for engine efficiency. 



EXAMINATION OF PLANT 



427 



(12) Obtain description of records showing fuel con- 

sumption. 

(13) Obtain description of records showing the consump- 

tion of miscellaneous supplies used. 

(14) Is exhaust steam returned to boilers? 

(15) How many employees are there and what are the 

duties of each? 

(16) Obtain copies of all records. 

(17) Any additional information. 

9. Packing Department 

( 1 ) May this department be considered a productive or 

a non-productive department? 

(2) What sort of package and what kinds of packing 

materials are used? 

(3) Are packages manufactured or produced? 

(4) How are packing materials, including nails, twine, 

wire, etc., obtained? 

(5) Obtain description of records which show consump- 

tion of materials. 

(6) How are values of the various materials obtained 

as applying to each particular shipment ? 

(7) Ascertain number of employees and their duties. 

(8) How is time and labor cost recorded and applied? 

(9) How are deliveries made to shipping department, 

and how accounted for? 

(10) Obtain description of machines or mechanical ap- 

pliances which are used. 

(11) Obtain copies of all forms used. 

(12) Any additional information. 

10. Shipping Department 

(i) How are shipments checked out? 

( 2 ) What is relation between factory and sales orders ? 



428 THE IXSTALLATIOX OF A COST SYSTEM 

(3) What records are kept and what reports are made 

to the cost office and general office? 

(4) Are shipments made from own siding or trucked 

to railroad stations? 

(5) How are partial shipments handled and recorded? 

(6) What mechanical aids are used? 

(7) How many employees are there and what are their 

duties ? 

(8) Obtain copies of all forms. 

(9) Any additional information. 

11, Estimating Department 

The organization of this department should be consid- 
ered, and its relation to the cost, sales, and other departments 
of the organization should be fully described. 

(i) Ascertain number of employees and the duties of 
each. 

(2) Obtain full description of the methods of making 

estimates. 

(3) Obtain description of the system in use for check- 

ing estimates as to material, labor, and overhead 
costs. 

(4) Obtain copies of all forms. 

(5) Any additional information. 

12. Cost Department 

Where a cost department is operated, a thorough exam- 
ination of all work done by this department should be made. 

( 1 ) Obtain a list of the names of all clerks and a full 

description of the work done by each. 

(2) Obtain a list of all forms and records in use to- 

gether with the information contained in each 
and the purpose of each. 

(3) Obtain complete information as to the various re- 



EXAMINATION OF PLANT 



429 



ports rendered to different executives and de- 
partment heads. Obtain description of each re- 
port in detail and its purpose. 

(4) Ascertain the provision for filing the various forms 
and disposition of the detailed reports and rec- 
ords. 

( 5 ) Any additional information. 

13. Factory Orders 

(i) Obtain description of the various kinds of factory- 
orders in use. 

(2) What is method of preparing orders? 

(3) Ascertain number of copies of orders issued and 

how they are sent to the various departments of 
the plant. 

(4) Obtain full description of the information contained 

upon each copy of the factory order. How is 
each cop}'- used and what is its final disposition? 

(5) Who is responsible for the issuance of factory or- 

ders and how are they issued ? 

(6) Is an order department maintained as a separate 

department of the organization? 

(7) How are factory orders registered? 

(8) What is the relation between sales orders and fac- 

tory orders ? 

(9) What is the relation between factory orders and 

shipping orders? 

(10) Obtain copies of all forms used in connection with 

factory orders and registering of same. 

(11) Any additional information. 

14. Raw Material and Storeroom Requirements 

How raw material is received, checked, stored, and put 
into operation should be noted carefully. It may then be fol- 
lowed through the factory step by step until it is transformed 



430 



THE INSTALLATION OF A COST SYSTEM 



into finished stock. The minimum and maximum quantities 
necessary should be known, and the disposition or utihzation 
of the waste and scrap material should also be looked into 
carefully. The item of by-products should receive special 
attention. 

The methods of storing raw material and part-finished 
stock and the possibilities of improvements should be con- 
sidered. If a stock system is not in use, there is no other place 
where leaks are more likely to be found than in the storeroom. 
Every business man insists that his cash be accounted for to 
the exact cent, yet it is not uncommon in a badly organized 
plant to see hundreds of dollars' worth of material scattered 
about without any method of safeguarding it or accounting 
for its use. The expense and trouble of keeping stock records 
are usually saved many times over by the saving in stock and 
the practical convenience of being able to tell at any time ex- 
actly how much stock is on hand and where it is located. 

Each stock-room should be examined, as it is necessary 
to handle bulk materials, such as pig iron, lumber, etc., sepa- 
rately from the smaller material items. In connection with 
raw material, the purchasing department, receiving department, 
and storeroom requirements should all receive attention. 

15. Purchasing Division 

( 1 ) Are purchases made on verbal or written requisi- 

tions? Obtain full particulars. 

(2) Is there any one responsible head, or are purchases 

made by several different people? Obtain par- 
ticulars. 

(3) Are complete records made of quotations received? 

(4) Is any accounting done in this division? If so, 

what ? 

(5) Ascertain filing methods, including filing of cata- 

logues and price records. 



EXAMINATION OF PLANT 



431 



(6) Are any orders placed verbally? If so, are they 

promptly confirmed in writing? 

(7) Obtain copies of all forms and books used. 

(8) Obtain list of names of office force, with duties. 

(9) Any additional information. 

16. Receiving Department 

(i) How are incoming goods handled? 

(2) Are there any mechanical appliances? Obtain de- 

scription. 

(3) What records are maintained? 

(4) Is there a track scale and a car record kept? If 

not, how are car loads received and checked out ? 

(5) How are partial shipments checked up and re- 

ported ? 

(6) Is trucking equipment owned? Of what does it 

consist? 

(7) Obtain copies of forms, books, etc. 

(8) If any goods are returned, how is accounting 

handled ? 

(9) How are overs, shorts, or damaged goods reported 

to purchasing department ? 
(10) Any additional information. 

17. Storeroom 

( 1 ) Are storerooms maintained for all raw materials 

and parts? 

(2) How many storerooms are there, and where lo- 

cated? 

(3) Do many factory employees have access tc stores? 

(4) Are heavy goods conveniently arranged as to 

classes and convenience of handling? Are they 
properly marked or tagged, and are there signs 
or other methods for locating classes? 



J32 



THE INSTALLATION OF A COST SYSTEM 



(5 

(6 



(7 

(8 

(9 
(lo 



II 

12 

13 
14 
15 
i6 

17 
i8 

19 
20 

(21 

C22 



Are there any mechanical devices such as trolleys, 
tiering machines, cars, etc. ? If so, obtain de- 
scription. 

Are there bins, shelves, racks, etc., of sufficient 
capacity, and are they arranged to best advan- 
tage for economical handling of goods? 

Are bin cards used? 

Are parts manufactured and carried in stock? 

Could any such parts be purchased for less money ? 

Is raw material carried in stock after passing 
through a process? If so, ascertain reason and 
obtain description. 

How is the quality of goods tested when received? 

What checks are maintained as to correctness of 
deliveries to manufacturing departments? 

How are such deliveries made, and are there tote 
boxes or other standard devices used? 

Are all deliveries covered by requisitions? If not, 
what are the exceptions and reasons therefor? 

Does storekeeper have copies of all standard bills 
of material or specifications? 

Are factory supplies furnished to departments on 
requisition? If not, how are they handled? 

Are obsolete parts or surplus stock reported reg- 
ularly to the management? 

How are returnable containers handled and ac- 
counted for? 

How does storekeeper request purchases? 

Is a perpetual inventory record maintained, and if 
so, how verified? 

Does such inventory record show quantities only 
or values and costs as well? 

How many employees are there, and what are their 
duties? 



EXAMINATION OF PLANT 433 

(23) Does the department appear to be efficiently 

handled ? 

(24) How does storekeeper handle excess materials is- 

sued and returned to stores? 

(25) Obtain copies of every form or record. 

(26) Any additional information. 

18. Labor and Labor Reports in Use 

The number of men occupied in productive and non-pro- 
ductive work should be recorded for each department of the 
plant, and the entire labor force should be classified as to the 
operations and different processes if it is possible to do so. 
The various systems of paying wages should be fully described 
in connection with the different products manufactured. 

Most of the information in regard to the labor cost will 
be obtained in answer to questions relating to the different 
manufacturing departments. 

(i) Obtain a copy of each report in use. 

(2) What is method of recording labor information, 

what use is made of it, and what is the final dis- 
position of information and detailed reports. 

(3) Ascertain method of preparing pay-roll and obtain 

a copy. 

(4) What is method of paying wages to employees? 

Obtain copy of the receipt form, if same is re- 
quired from employees. 

(5) Obtain full information as to method of preparing 

pay-roll analysis. 

(6) Procure names of the clerks in the pay-roll depart- 

ment and ascertain the duties of each. 

(7) Obtain full description of the method of checking 

the work in the pay-roll department as well as 
the check as to the system of paying wages. 

(8) Any additional information. 



434 



THE INSTALLATION OF A COST SYSTEM 



19. Factory Overhead Items 

Provision should be made for classifying all factory over- 
head items so that as many as possible may be applied directly 
to some definite department. The basis of apportioning each 
such item should be fully described. 

Much of the data relative to the amounts composing the 
factory overhead may be obtained from the accounts kept in' 
the general and factory ledgers. If an analysis of detailed 
overhead items is not complete enough, any suggested changes 
should be discussed with the management and head of the 
accounting department. Where the accounts are well ar- 
ranged, they may present valuable overhead information which 
would otherwise have to be determined by estimate or experi- 
ment. 

In establishing the methods of distributing factory over- 
head, detailed information is necessary for ascertaining the 
various percentages and rates. 

( 1 ) Obtain a list of all factory overhead items. 

(2) Ascertain the relation of each item to the various 

departments of the plant and various products 
manufactured, 

(3) Obtain full description of the method which is now 

in use for distributing the factory overhead items 
to the various departments of the plant. 

(4) Ascertain the method of applying the factory over- 

head to the cost of the job, order, article, or 
process. 

(5) Obtain description of the method of providing for 

overhead when preparing estimates for new busi- 
ness. 

(6) Obtain copies of all forms relating to factory over- 

head items. 

(7) Any additional information, 



EXAMINATION OF PLANT 435 

20. Production 

The production will also be considered as each depart- 
ment is examined. The classification of the product and the 
classification of the factory orders will indicate the kind of 
work done by the different departments. In considering pro- 
duction, the following information is desirable : 

(i) Obtain full information as to the method of re- 
porting production to the office and cost depart- 
ment. 

(2) Ascertain the method of transferring production to 

the various stock-rooms. 

(3) Ascertain the method of checking the production 

information as reported by the manufacturing de- 
partments. 

(4) What is the relation, if any, between the produc- 

tion and the packing and shipping department in- 
formation ? 

(5) Ascertain how special production is handled, if it 

is treated differently from the standard product 
manufactured. 

(6) Obtain copies of all production forms and descrip- 

tion of the use of each. 

(7) Any additional information. 

21. Finished Parts and Finished Stock 

The questions dealing with the raw material storerooms 
apply also to the requirements as to the finished stock and 
finished-parts stock items. 

(i) List the various stock-rooms and the location of 
each, 

(2) How is the product placed in stock and how is it 

requisitioned from stock? 

(3) Ascertain the relation of the stock-rooms to the 



436 THE INSTALLATION OF A COST SYSTEM 

operating departments of the plant as shown by 
the production reports. 

(4) Ascertain the relation of the stock-rooms to the 

packing or shipping departments as shown by the 
shipping records. 

(5) Obtain full description of the method of keeping bin 

records if same are in use. 

(6) Ascertain how stock transfers are made. 

(7) What are the requirements as to obsolete stock 

items ? 

(8) Obtain complete description of stock records, and if 

values are entered, description of the method of 
costing the various items upon the records. 

(9) Obtain copies of all forms. 
(10) Any additional information. 

22. Compiling the Costs 

(i) Ascertain the method of transferring information 
as to the material cost from the detailed material 
reports. 

(2) Ascertain the method of transferring information 

as to labor costs from the detailed labor reports. 

(3) Ascertain the method for providing for overhead 

cost. 

(4) Ascertain the method of keeping track of the pro- 

duction reported for each factory order. 

(5) What is the method of checking, comparing, and 

verifying costs as compiled upon the cost sheet 
or other cost record. 

(6) Obtain copy of cost sheet or other cost records and 

ascertain purpose for which each record is used. 

(7) Obtain copies of all process cost records. 

(8) Obtain copies of all cost records which are compiled 

as a basis for setting rates or standardizing costs. 



EXAMINATION OF PLANT 437 

(9) Obtain copies of all other cost forms with descrip- 
tion of the use of each. 
(10) Any additional information. 

23. Cost Summarizing Records 

Secure full description of summary records dealing with : 

(i) Charges for material. 

(2) Labor charges, both productive and non-productive. 

(3) Charges for factory overhead items. 

(4) Transfers of material. 

(5) Transfers of labor. 

(6) Distribution of the factory overhead to the various 

departments of the plant. 

(7) Miscellaneous adjusting entries. (All adjusting 

entries should also be fully described, and it may 
be necessary to make an examination of several 
months' transactions which show adjustments.) 

(8) Methods of reporting production. 

(9) Shipments of merchandise. 

(10) Return of merchandise to stock. 

(11) Obtain copies of all forms and complete description 

of the use of each form not dealt with in the pre- 
ceding queries^ 

(12) Any additional information. 

24. General Accounting Records pf Original Entry 

(i) Obtain copies of all general accounting records 
which have not been considered previously, with 
descriptions of their use. 

(2) Ascertain the connection of each record with the 

cost summarizing records. 

(3) Ascertain the name and all the duties of the clerk 

keeping each record. 

(4) Any additional information. 



438 THE IXSTALLATIOX OF A COST SYSTEM 

25. General System of Accounting 

(i) Obtain a complete list of all private ledger, general 
ledger, and factory ledger accounts. 

(2) Obtain full description of any system of symbols 

or account numbers in use. 

(3) Ascertain the duties of the clerks who keep the 

private, general, and factory ledger accounts. 

(4) Ascertain the method of preparing trial balances 

and balancing them with subsidiary supporting 
ledgers and records. 

(5) Obtain information regarding the method of check- 

ing the valuations of plant assets. 

(6) Obtain the viewpoint of the management in regard 

to the contemplated changes in the ledger 
accounts. 

(7) Obtain copies of forms of accounts, noting if any 

accounts are of a special form. Obtain descrip- 
tion of those of a special character. 

(8) Any additional information. 

26. Statements 

(i) Obtain the list of the financial and factory state- 
ments which are prepared at the end of a fiscal 
period. If possible, obtain a copy of these state- 
ments showing the financial condition and results. 

(2) Obtain copies of the factory and financial state- 

ments prepared at different times during the fiscal 
year. 

(3) Ascertain fully the method of preparing each state- 

ment, and the source of its information. 

(4) Ascertain the duties of all clerks who prepare state- 

ments which are submitted to the management. 

(5) Ascertain fully the purpose for which the state- 

ments are used. 



EXAMINATION OF PLANT 439 

(6) Obtain the opinion of the management as to what 

additional statements might be desirable. 

(7) Any additional information. 

27. Miscellaneous Information 

While the preceding queries and suggestions cover the 
information required for use in the installation of complete 
cost accounting methods, it is often desirable in the interest 
of efficiency to obtain further details as to the work of the or- 
ganization. For example, it may be discovered that some of 
the general clerks are able to handle certain cost work in 
addition to their regular duties. Therefore, the investigation 
should cover the following general office and accounting work : 

(i) Method of handling mail and correspondence. 

(2) Method of handling and controlling postage stamps. 

(3) FiHng system in use. 

(4) Card index system and method of handling. 

(5) Divisions of the administrative organizations and 

number of employees in each. 

(6) Description of any forms or records which have 

not been already considered. 

(7) Billing system in use and method of preparing in- 

voices for customers. 

(8) Collection methods in use and description of rec- 

ords. 

(9) Stationery records and condition of stationery 

stock. 

(10) List of all forms which are not being actually used 

at the time the examination is made. 

(11) Method of using each of the forms which have 

become obsolete. 

(12) Standard of clerical work and whether there is any 

provision made for keeping work up to date. 



440 THE INSTALLATION OF A COST SYSTEM 

( 13 ) Objections offered against introduction of improved 

accounting and efficiency methods. 

(14) Method of handling experimental work. 

(15) Method of guarding against strikes or other labor 

troubles. 

(16) Method of taking inventory at such time as finan- 

cial records are closed. This should include a 
full description of the method of counting, listing, 
and obtaining an inventory, together with the 
method of pricing the raw material, work in 
process, finished-parts, and finished stock items. 

(17) Method of making inventory tests, if any are made 

during the fiscal year. 

(18) Method of adjusting accounts and records if the 

test shows discrepancies in inventory items. 

(19) Method of recording cash sales, obtaining copies 

of all records which should show this informa- 
tion. 

(20) Method of treating small orders received from va- 

rious customers and how same are billed if they 
are treated specially. 

(21) Method of recording the information as to cash 

purchases, obtaining copies of records relating 
to same. 

Examination of Auxiliary Mechanisms 

Besides the examination of the regular machinery used in 
the manufacture of the product, attention should be directed 
to auxiliary mechanical service, which is a very important 
factor in running a shop to the best advantage. This field cov- 
ers a wide range, but the following are suggested : time clocks, 
time stamps, patent time cards, carrying belts, automatic coun- 
ters, arrangements of yard service, factory telephones, standard 
jigs and dies, special arrangement for heavy or peculiar tools, 



EXAMINATION OF PLANT 



441 



mechanical devices in the office, such as adding machines, mul- 
tiplying machines, slide rules, sorting machines, pay-roll ma- 
chines, tabulating machines, etc. 

Method of Obtaining Information 

It is apparent that the information to be gathered by the 
examination outlined depends to a large extent upon the size 
of the business, and that it should be obtained only as fast 
as it can be digested and analyzed. A satisfactory plan is 
for the examiner to spend the forenoon of the day in examining 
one or more departments and their records and in making 
the necessary notes as the answers to queries are received. 
The afternoon of the day may be utilized in writing up in de- 
tail the results of the morning's work. Thus, it is possible 
to review the work done in the forenoon while the details are 
still fresh in mind and to add any information that may have 
been overlooked in the first place. In providing for changes 
or new systems, so far as is practicable the existing methods 
should be incorporated in the new and the work thus planned 
along the lines of least resistance. Often one or two changes 
in a form in current use, or in its headings, or an extra column 
or tv/o, will furnish a basis for supplying additional infor- 
mation required so that accurate cost data may be gathered. 



CHAPTER XXVI 

INSTALLING A COST SYSTEM— METHOD OF 
STARTING OPERATIONS 

Preliminary Test of Records 

No general statement would cover the various matters 
which should receive first attention when a cost system is being 
installed. The exact starting point will depend, to a large ex- 
tent, upon the kind of industry and the manufacturing condi- 
tions peculiar to the business under consideration. In general, 
however, it may be said that the forms, records, and methods 
to be used should all be prepared and tested before the date 
when actual cost compiling begins. For example, the records 
may be used by the factory and office employees for a period 
of a week or two merely with the object of "trying them 
out," which would enable the personnel to become thoroughly 
familiar with the method of keeping each form and record 
and the method of reporting the information. This is par- 
ticularly important in so far as concerns the detailed material, 
labor, and production reports, as these records originate in 
the factory and are prepared in part or in whole by factory 
employees who may be unused to clerical work of this kind. 
The methods of summarizing the various items of cost may be 
postponed until the actual reports begin to come in from the 
factory departments, which is always a day or two after the 
cost system is started. 

Full and complete instructions should be given to every 
official and clerk in any way concerned with the operation of 
the system, and these instructions should be supplemented by 
copies of the forms and records which each person is re- 

442 



METHOD OF STARTING OPERATIONS 



443 



quired to handle. All differences of opinion and doubts in the 
minds of the executives and clerks responsible for the system 
should be properly adjusted before the actual cost work be- 
gins. It is true that time may not in all cases permit extensive 
preparation, but in a large number of instances, when a cost 
system is installed in a hurry, it fails to work satisfactorily 
and is in consequence condemned before it has been given a fair 
trial. Lack of preparation, and a lack of knowledge of the 
proposed methods on the part of employees, are frequent causes 
of its failure. 

Order of Procedure 

Assuming that all necessary preparatory work has been 
done, the next procedure is to take up in logical order the 
steps necessary to get the system working in its full stride. 
In summarized form these would consist of the following 
operations : 

1. Classifying and reanalyzing the beginning inventory. 

2. Entering inventory upon the records. 

3. Starting new orders in the factory. 

4. Overhead distribution. 

5. Classification of the product, departments, and ac- 

counts. 

6. Reports and records. 

Classifying and Reanalyzing the Beginning Inventory 

If the last physical inventory has been taken and classi- 
fied with a view to the installation of a cost system, a re- 
classification or reanalysis may be unnecessary. However, in 
most instances, it will be found that no attention has been 
given to the matter. The importance of an accurate physical 
inventory has already been repeatedly emphasized. Cost ac- 
counting deals principally with keeping track of the items 
composing this inventory, and therefore, being the basis of 



AU 



THE INSTALLATION OF A COST SYSTEM 



the whole system, too great emphasis cannot be laid upon the 
fact that it must be as accurate as possible. 

The analysis of the inventory is necessary, as already 
stated, so that the various controlling accounts for raw ma- 
terial, work in process, finished parts stock, and finished stock 
may be started with the proper beginning balances. The de- 
tails which make up these balances should always prove and 
be in agreement with the total amount as shown by the actual 
physical inventory. 

The raw niaterial items are subdivided into different 
classifications when separate controlling accounts are estab- 
lished for the various materials and supplies items which com- 
pose this portion of the inventory. If a separate controlling 
account is kept for each operating department, it is necessary 
to reanalyze the work in process so as to ascertain the costs 
chargeable to each department. Often a proof is made of 
the elements of material, labor, and overhead charged to de- 
partmental work-in-process accounts, and this proof may ne- 
cessitate a further subdivision of the details. The finished 
parts stock items may be controlled by several accounts, de- 
pending upon their classifications. Therefore, it may be nec- 
essary to analyze these inventory items so as to ascertain the 
total amount applicable to each class of finished parts on hand. 
The same procedure is applicable to finished stock. Where 
the inventory consists of several hundred sheets and no pre- 
vious attempt has been made to classify the items, the analysis 
will involve much clerical work, on which it may be necessary 
to employ a special corps of clerks. 

After the inventory has been reclassified and the analysis 
proved, the controlling totals can then be obtained and the 
balances entered in the different raw material, work in process, 
finished parts, and finished stock accounts. These, as pre- 
viously stated, may be kept either on the general ledger or in 
a separate subsidiary factory ledger. 



METHOD OF STARTING OPERATIONS 445 

Entering Inventory on Records 

When a complete cost system is in operation, all control- 
ling accounts are supported by subsidiary stores ledgers and 
cost records. Therefore it is necessary to provide for entering 
the detailed items of the raw material, finished parts stock, 
and finished stock upon stores ledger accounts and the work 
in process items upon cost sheets or process cost records. 
Frequently it is necessary to keep separate accounts for each 
style, grade, size, and kind of material. These stores ledger 
accounts should all be started with the quantity on hand as 
shown by the beginning inventory. 

If valuations are entered on the accounts, the price per 
unit of measure and total cost for the quantity on hand must 
be recorded. Where the raw material items are controlled 
by several controlling accounts, the different sections of the 
stores ledger are classified accordingly in separate binders, or 
in separate drawers or cabinets if cards are used. Exactly 
the same procedure is applied to the classification and control 
of finished parts and finished stock or product. 

Proof of Entries 

After the entries have been made upon the raw material, 
finished parts, and finished stock stores ledger accounts, a 
proof should be made of the quantity and the amount entered 
thereon. This proof is established by adding the balances 
shown upon the accounts by means of an adding machine and 
proving it with the analysis of the merchandise inventory for 
each section, this analysis being in agreement with the sum- 
mary of the merchandise inventory. 

While the stores ledger accounts in the subsidiary ledger 
constitute the main office records, bin records may be kept in 
addition to these. Where this is done the quantities shown 
upon the stores ledger accounts must also be entered upon the 
detailed bin records for each item composing the raw material, 



446 THE INSTALLATION OF A COST SYSTEM 

finished parts stock, and finished stock items. A proof should 
be made of the bin records by comparing the information 
shown thereon with that shown on the stores ledger accounts. 

Handling Work in Process Items 

In handling the work in process items, if the order method 
of cost-finding is used, every job in process at an inventory 
date should be given a definite number. A cost sheet should 
then be started for each job, and its total cost, as shown by the 
analysis of the merchandise inventory, should be entered upon 
its cost sheet. A proof should be made by adding the details 
shown upon the cost sheets and comparing the totals with the 
balances in the various work in process controlling accounts. 

Where the process method of cost-finding is used, all 
articles in the operating departments should be grouped, first, 
according to the classification of the product, and secondly, 
according to stages of completion. Provision must be made for 
checking the total cost of this work in process from inventory 
date until it is finally completed. This may be done in two 
ways. One method is to enter an order for each kind of 
product or article in process in the various departments and 
follow the orders through as under the order method until 
completed. Another method is to convert the work in process 
at inventory date into raw material or finished parts stock, 
analyzing upon process cost records the material and labor 
costs in each case. 

If cumulative costs are to be transferred from depart- 
ment to department, they may be summarized and entered upon 
various departmental cost records without the necessity of 
entering any details upon separate process cost records. 

Starting New Orders in the Factory 

All items composing the merchandise inventory should 
be entered upon various subsidiary records which are con- 



METHOD OF STARTING OPERATIONS 447 

trolled by the factory accounts kept in either the general or 
factory ledger. The work in process at inventory date should 
be definitely designated so that the detailed reports will cover 
all items of uncompleted product. Provision must also be 
made for definitely designating the new orders to be started. 

The required number of order copies should be deter- 
mined during the preliminary discussion prior to the date of 
starting the cost system. If the order method is to be used, 
all work must be definitely designated by distinctive factory 
order numbers or job numbers. If the process method is em- 
ployed, the product should be distinguished by names or num- 
bers allotted to the different lots or batches and to each opera- 
tion or process. 

Cost sheets should be prepared for each job, order, ar- 
ticle, or process, distinguished under the order method by the 
job or order number, and under the process method by the 
names or numbers of the processes or operations. Each day, 
as the material, labor, and production reports are received, 
the information contained on them is transferred to the cost 
sheets, process cost records, or other cost records. The post- 
ing of these records covers a large part of cost accounting 
procedure. The detailed reports should be summarized, 
proved, and analyzed as to the charges and credits for the 
various accounts afifected. 

Overhead Distribution 

In cases where cost methods are being adopted for the 
first time, fixed rates or percentages for the distribution of 
factory overhead usually will not have been considered or 
determined. Assuming that the precise methods to be used 
have been decided upon during the preliminary conference 
preceding the installation of the cost system, it will then be 
necessary to obtain certain data from the accounting records 
of previous periods before departmental rates or percentages 



^48 THE IXSTALLATION OF A COST SYSTEM 

can be coinpiled. This work often involves a thorough ex- 
amination and analysis of the accounts, which should be 
proved with the prior financial statements and trial balances. 
After proving the results, it is advisable to consider any- 
possible increases in overhead which may occur during the 
new period. For example, the foremen may receive an in- 
crease in wages, or the renting of additional space may be con- 
templated, or a cost department and corps of inspectors may 
increase the overhead. All items which would afTect the over- 
head percentages for future periods should be considered be- 
fore current rates or percentages are established. The method 
of distribution should provide for a proof of the overhead 
percentages or rates, and the adjustment of discrepancies 
should be made as soon as they are discovered. 

Classification of Product, Departments, and Accounts 

Although the classification of the product, the names of 
the departments, and the general and factory ledger accounts 
to be opened should be determined and any difference of opin- 
ion adjusted before the new methods are put into operation, 
it will often be found necessary to make changes in these mat- 
ters after the cost system is started. These changes should 
be considered as promptly as possible and adopted, if neces- 
sary, without delay. 

Reports and Records 

Assuming that the factory records have been given a pre- 
liminary trial and that the employees are thoroughly familiar 
with their nature and purpose, attention must then be given 
to the method of summarizing the reports and familiarizing 
the personnel with the procedure involved. This work should 
also be done, if possible, during the preliminary period. Af- 
t:r the summaries are prepared, the posting of the information 
to the ledger accounts "ill be in order. 



METHOD OF STARTING OPERATIONS 



449 



Trial balances should be prepared to prove the mathe- 
matical accuracy of the subsidiary stores ledgers and cost rec- 
ords. Statements should then be made out before any adjust- 
ments are considered, for the reason that discrepancies are 
often brought to light in a statement that would otherwise 
be unnoticed. During the first few periods, a cost system may 
not operate as smoothly as it will later when necessary adjust- 
ments have been made. No discouragement need be felt if 
these adjustments are required, because lack of proper infor- 
mation or the overlooking of certain details may have caused 
them. Of course, every effort should be made to reduce all 
discrepancies to a minimum, so that the reports and records 
may serve their true function of indicating inefficiencies in 
the factory operation and in the organization. 



Part VI — Simplified Cost-Finding Methods 



CHAPTER XXVII 

ELEMENTARY COST SYSTEMS 

Valuation of Closing Inventory 

One of the advantages of operating a perpetual inventory, 
as previously pointed out, is that it enables a balance sheet with 
a supporting manufacturing profit and loss statement or a 
trading and profit and loss statement to be prepared at the end 
of each cost period without the necessity of making a count 
and valuation of the items of stock and merchandise on hand. 
In many mercantile houses and in some manufacturing busi- 
nesses a perpetual inventory is not maintained either because 
of the multiplicity of the lines handled or because of the small 
intrinsic value of the product. Under these conditions, if the 
{)roduct or lines sold are homogeneous and the average gross 
profit made on all lines can be determined with fair accuracy, 
the value of the closing inventory may be ascertained in the 
following simple way: Determine first the cost of sales for 
the month by deducting from the sales the percentage of gross 
profit. Thus, if sales for the period are $i,ooo and the gross 
profit on them is 50%, the cost of sales figure is $500. Then 
from the total charges for the month deduct the cost of sales. 
The remainder represents the value of the closing inventory. 

It may be noted that the cost of sales can only be accu- 
rately determined in this way when material and labor costs 
are either more or less fixed or when fluctuations in these items 
are reflected in the selling price. In other words, any increase 
or decrease in the items of cost must show a corresponding in- 
crease or decrease in the selling prices. Where this is true 

451 



452 SIMPLIFIED COST-FINDING METHODS 

and the industry earns a fixed percentage of gross profit, finan- 
cial statements may be prepared at the end of any period. 

Method of Preparing Statements 

The method of preparing statements may be concisely 
illustrated by using the trial balance presented in Chapter XIX, 
which at the end of the first period was as follows : 

The Brown Manufacturing Company 

General Ledger Trial Balance 
January 31, 1918 

1 Cash $ 39,700.00 

2 Accounts Receivable 159,000.00 

3 Notes Receivable 15,000.00 

4 Merchandise Inventory (balance, 

January i ) 226,700.00 

5 Machinery and Fixtures 35,000.00 

6 Notes Payable $ 15,000.00 

7 Accounts Payable 64,000.00 

8 Pay-Roll 

9 Capital Stock 350,000.00 

10 Surplus 54,700.00 

1 1 Sales 85,000.00 

12 Merchandise Purchases 59,000.00 

13 Productive Labor 18,000.00 

14 Factory Indirect Expense 7,000.00 

15 Selling Expenses 5,800.00 

16 Administrative Expenses 3,500.00 

$568,700.00 $568,700.00 

If an examination of the financial statements covering 
several previous periods shows that the gross profit averages 
30% of the sales, it is obvious that 70% of the sales constitutes 
their manufacturing cost. In the above example sales amount 
to $85,000. Thirty per cent of this amount represents the gross 
profit of $25,500, and 70%, or $59,500, represents the cost 
of the sales. From these facts, a statement may be prepared 
showing the value of the closing merchandise inventory. 



ELEMENTARY COST SYSTEMS 



453 



Schedule Showing Merchandise Inventory 
January 31, 1918 

Merchandise Inventory, January i, 1918 $226,700.00 

Charges for January, 1918: 

Merchandise Purchases $59,000.00 

Productive Labor 18,000.00 

Factory Indirect Expenses 7,000.00 



Total Charges for the Month 



84,000.00 



Total $310,700.00 

Credits for January, 1918: 
Cost of Sales (70% of $85,000) 59,500.00 



Merchandise Inventory, January 31, 1918 $251,200.00 

With the cost of sales and the value of the closing inven- 
tory determined, financial statements may then be prepared. 

The Brown Manufacturing Company 

Estimated Statement of Assets and Liabilities 

January 31, 1918 



Assets 

Cash $ 39,700.00 

Accounts Receivable. 159,000.00 

Notes Receivable 15,000.00 

Merchandise Inven- 
tory (estimated)... 251,200.00 
Machinery and Fix- 
tures 35,000.00 



Total Assets $499,900.00 



Liabilities 

Notes Payable $ 15,000.00 

Accounts Payable . . . 64,000.00 



Total Liabilities $ 79,000.00 

Capital Stock 350,000.00 

Surplus 54,700.00 

Estimated Net Profit. 16,200.00 



Total Liabilities and 

Capital $499,900.00 



The Brown Manufacturing Company 

Estimated Manufacturing and Profit and Loss 

Statement 

For the Month of January, 1918 

Sales $85,000.00 

Cost of Sales: 

Merchandise Inventory, January i, 1918. . $226,700.00 
Merchandise Purchases 59,000.00 



454 SIMPLIFIED COST-FINDING METHODS 

Productive Labor 18,000.00 

Factory Indirect Expenses 7,000.00 

Total $310,700.00 

Less Merchandise Inventory, January 31, 

1918 251,200.00 

Total Cost of Sales (70%) 59,500.00 

Gross Profit (30%) $25,500.00 

Expenses: 

Selling Expenses $ 5,800.00 

Administrative Expenses 3,500.00 

Total Expenses 9,300.00 

Net Profit $16,200.00 

The above statement is drawn up In its simplest possible 
form, it being understood that a more detailed analysis of the 
merchandise purchases, productive labor, factory indirect ex- 
penses, selling expenses, and administrative expenses may be 
made, or separate supporting schedules may give the detailed 
items composing each of these totals. 

In preparing the statement, the items are taken directly 
from the trial balance and general ledger accounts. Given 
the average percentage of gross profit, the inventory may be 
obtained from the calculations made on the statement. After 
the estimated valuation of the merchandise inventory is ar- 
rived at under this method, a comparison of the estimated 
amount with that of an actual physical inventory would prove 
the accuracy of the method and the correctness of the per- 
centage figure used. 

Advantages of Percentage Method 

The advantage of this plan lies in its simplicity. It elimi- 
nates the necessity of costing each separate invoice to a cus- 
tomer and also of keeping account of the cost of merchandise 
returns. This part of cost work is burdensome, as it involves 



ELEMENTARY COST SYSTEMS 455 

a considerable amount of detailed calculations and summariz- 
ing. A further argument in favor of the adoption of this 
simple method is that, if the inventory and cost of sales figures 
as shown by estimated statements prove to be unreliable, this 
is one of the best reasons for the adoption of more complete 
cost-finding methods. A cost system, in whole or in part, is 
often installed if statements based on estimates can be shown 
to be an ineffective check upon the operations of the business. 

Percentage Method Applied to Several Product Classifications 

Where different kinds of articles are sold, separate de- 
partments may be established for each product classification. 
The percentage of gross profit and of cost of sales may then 
be ascertained for each department and the statement devel- 
oped to show the inventory valuation of each kind of article 
or product. When this is done, records are required to show : 
( I ) the transfer of any merchandise and labor items from one 
department to another, and (2) the material and supplies 
requisitioned, to be charged to departmental accounts. 

Where several departments are established, it is well to 
provide a complete chart of accounts and analysis records so 
that the charges and credits affecting each department account 
may be correctly ascertained, for which purpose some of the 
cost summarizing records described in Chapters XVI, XVII, 
and XVIII may be used to advantage. 

Unit Method of Figuring Costs 

Where only one or a few kinds of product are handled, 
such as in the case of an ice manufacturing plant, or a dealer 
in coal and firewood, costs can be readily obtained if stock 
records are kept showing the quantities or units of merchan- 
dise on hand at the beginning of the period, the quantities 
purchased or manufactured, and the quantities sold. Assum- 
ing that the ledger accounts show the amount of materials and 



456 SIMPLIFIED COST-FINDING METHODS 

supplies used, wages paid for productive labor, and the indi- 
rect expenses, the average cost per ton, pound, barrel, cord, 
or any other unit may be obtained by dividing the number of 
units produced or purchased during the period into the total 
costs for the same period. When this plan is used, it is un- 
necessary to change the method of keeping the accounts in the 
general ledger. The ordinary financial accounts plus data as 
to the above-mentioned quantities or units are all that is re- 
quired to obtain the cost of sales and thus figure the value 
of the closing inventory and prepare financial statements. 

The advantages of this plan lie in its simplicity, as the 
cost of sales is ascertained without the large amount of de- 
tailed work involved in costing invoices separately. More; 
over, the plan often brings to light discrepancies, thus indi- 
rectly proving the value of more detailed methods when more 
than one line of product is handled. 

Applicability of Unit Method 

The unit method is applicable to both mercantile and man- 
ufacturing concerns. It may be used by real estate concerns 
when a large tract of property is purchased, developed, and 
divided into lots for sale. A record is kept of the number 
of lots obtained from the tract, and this number divided into 
the cost of development to date gives the cost of sales on each 
lot sold. Selling prices on various lots may be estabHshed 
from the lot record in connection with the development costs 
of the property. Then each lot sold may be traced both as to 
cost and selling price, and a profit and loss statement, using 
this information as a basis, may be prepared. 

The system may also be used in the retail coal business 
by keeping stock records of the tons or other units of each 
kind of coal purchased and sold and by determining the aver- 
age purchase price of each unit as a basis for calculating the 
cost of sales. Provision may need to be made for the trans- 



ELEMENTARY COST SYSTEMS 



457 



fers of coal from one location to another and also for any loss 
in weight. The latter should be provided for by means of a 
percentage based on past experience. 

In wholesale and jobbing industries, where the product 
sold is more or less uniform in character and where ample 
stock records may be provided for keeping track of the quan- 
tities on hand, purchased, and sold, these records would form 
the basis for obtaining the cost of sales if the average purchase 
price were first determined. In small businesses the ledger 
accounts may be ruled to show the quantities of merchandise 
purchased, produced, and sold. Where this is done, it is not 
necessary to keep a subsidiary record of stock. 

Thus, the unit method of figuring costs is widely appli- 
cable. The accuracy of the statements prepared in this way 
will depend upon the correctness of the figures as to quantities, 
and those as to the average cost of sales. Where different 
kinds of product are handled and the cost of sales cannot be 
averaged, sales must be departmentalized and provision made 
for charging the material, labor, and indirect expenses to the 
various departments. Where departments are established, the 
accounts should be classified so that the charges and credits in 
each case may be accurately made. 

Proof of Records 

Where the preparation of financial statements is based 
on the number of units sold, it is necessary to prove the quan- 
tities entered upon the stock records or upon such records as 
are used to obtain the cost of sales. These figures should 
agree at the end of each period with the quantity reported 
sold as shown by the sales record. The quantitv of merchan- 
dise returned must also be deducted from the quantity shipped 
before the cost of sales can be ascertained. 

The value of the periodical statements will depend, to a 
large extent, upon the accuracy of the quantities obtained from 



458 SIMPLIFIED COST-FINDING METHODS 

the detailed records. Proof of this portion of the work can 
only be made at such times as an actual physical inventory is 
taken. Where the business is well departmentalized and com- 
plete stock records are kept, it is often possible to make tests 
of different items composing the merchandise inventory at 
different times during the year. When these tests are made, 
any differences should be adjusted before the financial state- 
ments are prepared at the end of the period. 



CHAPTER XXVIII 

ESTIMATING COST SYSTEMS 

Special Features of Estimating Method 

An estimating cost system is one in which the cost of pro- 
duction is checked and controlled by means of estimates as to 
what the actual expenditures on certain articles or groups of 
products are expected to be. The predetermined estimates are 
usually based on previous results when the figures are avail- 
able. But if the article or group of articles to be manufactured 
consists of a new line, the estimates must be based on the 
opinion of the designer of the product or the factory superin- 
tendent, foreman, or other experienced employee. 

When costs are found and controlled by the order or 
process method of cost-finding, material, labor, and overhead 
figures are compiled, as the work progresses, on separate sets 
of records for every job, order, or process. "When costs are 
controlled by means of estimates, the figures are compiled for 
articles or groups of different articles, the number of the 
records which are necessary depending upon the analysis of 
the cost elements and the number of accounts established as a 
means for proving the estimates. The estimated costs are in- 
corporated in the financial accounts through a simple system 
of records, thereby establishing an accounting proof or check 
on the accuracy of the predetermined figures on which the 
selling prices are based. If the profit or loss on certain 
articles or lines at the end of the year is not satisfactory, the 
estimates are revised and the selling prices adjusted accord- 
ingly. As will be more clearly seen later, the purpose of the 
estimating method is to insure an adequate profit on the mer- 
chandise sold and to prove the costs in detail. 

459 



4()0 SIMPLIFIED COST-FINDING METHODS 

The advantages of controlling costs by estimates are 
twofold : First the clerical work is much less than that which is 
required to operate a complete job order cost system or process 
cost system, as the detailed records of material, labor, and 
overhead covering hundreds or even thousands of orders are 
compressed into a comparatively small number of records. 
Secondly, discrepancies between the predetermined and actual 
figures indicate where the estimates were at fault in the first 
instance and thus indicate in v/hat direction more detailed 
methods of cost-finding may advantageously be installed. 

Method of Operating System 

In the operation of all estimating cost systems the fac- 
tory receives credit for the cost of the articles produced, which 
articles are priced at their estimated figures. The factory is 
charged with the material, labor, and overhead expense inci- 
dental to the production of the articles. Where the product 
manufactured is of one kind and the styles, sizes, or designs 
are few in number, it may be practicable to credit the factory 
with the total production cost. But if the estimated total cost 
credited to the factory fails to agree — when a proof of total cost 
is made — with the actual total cost debited, the credit, which 
the factory receives for work done, may be divided into its 
elements of material, labor, and overhead and the estimated 
figures predetermined in the same way, i.e., as to the ele- 
ments of cost. As the factory is charged with the elements of 
material, labor, and overhead cost from distinctive records, 
the proof of each of the elements of cost may be separately 
made. 

In more complex industries where various kinds of prod- 
uct are manufactured, analysis records may be kept for show- 
ing the material, labor, and overhead costs applicable to each 
lot of product or each group of articles. When the factory is 
credited with the estimated cost of the work done, these credits 



ESTIMATING COST SYSTEMS 461 

should also be analyzed into the lots or groups into which the 
factory production is divided. 

Summary of Procedure 

The various steps in the operation of an estimated cost 
system may be summarized as follows : 

1. Estimated costs are predetermined for every article 

manufactured and sold. The figures may show 
the total cost only or the details of material, labor, 
and overhead. 

2. The accounts showing the factory operations either 

as to the total cost of the lot or as to its elements 
are charged with the beginning inventory priced 
at the estimated figures and the actual material, 
labor, and overhead expenses incurred during the 
period. 

3. The accounts showing the factory operations are 

credited with the total cost of the articles produced, 
priced at their estimated figures. (The balance 
of the accounts showing factory operations repre- 
sents the value of the closing inventory.) 

4. A physical inventory is taken at the end of the period 

and is priced at the estimated figures. 

5. A comparison is made between the book inventory as 

shown by the account balances with the total 
amount of the inventory based upon an actual 
physical stock-taking. Any discrepancies between 
the two sets of figures indicate the extent of 
errors made in the predetermined estimates. 

Development of System 

There are several methods or, more accurately, stages of 
development in cost-finding by means of predetermined esti- 
mates, ranging in scope as follows : 



462 SIMPLIFIED COST-FINDING METHODS 

1. Verification of estimated costs in total amount. 

2. Verification of the material, labor, and overhead costs 

in total. 

3. Verification of estimated costs of the different prod- 

ucts manufactured, provision being made for prov- 
ing the estimated cost of each product separately. 

4. Verification of estimated costs in the different operat- 

ing departments of the plant, the estimated cost 
in each being proved separately. 

It is the intention in this chapter to develop the subject 
from a simple method of proving the estimated costs in total, 
to a more elaborate system whereby details are proven. It 
should be clearly understood that the proof of estimated costs 
can only be made when a physical inventory is taken, and 
that the inventory must be priced at the estimated costs. 

Verification of Total Costs — First Method 

Special Records Required 

Where the estimates of the articles manufactured are 
proved only as to their total cost, the following records are 
required in addition to the regular financial records : 

1. A schedule showing the total estimated cost of each 

article. 

2. A record showing the total estimated cost of the 

articles produced and sold. 

The schedule of estimated costs (Form 99) is a columnar- 
ruled sheet on which are listed the article or style number, 
grade or kind, and total estimated cost of each article. The 
information as to the estimated cost of sales is entered upon 
the sheet illustrated in Form 100, on which the details are 
summarized so that the total cost of all sales can be ascertained 
at the end of the month. 



ESTIMATING COST SYSTEMS 



463 



SCHEDULE OF ESTIMATED COSTS 

For 19 


Article No. 

OR 

Style No. 


Grade or Kind 


Total 

Estimated 

Cost 


V 













































Form 99. Schedule of Total Estimated Costs. (Size, 8x11.) 



ESTIMATED COST OF SALES 

No 

For 19 


Article 

No. OR 

Style No. 


Quantity 
Sold 


Kind or Description 


Estimated 
Unit 
Cost 


Total 
Cost 









































































Form 100. Summary of Estimated Cost of Sales. (Size, 8 x 11.) 



404 SIMPLIFIED COST-FINDING METHODS 

General Ledger Accounts 

For the purpose of showing the difference (if any) be- 
tween the estimated costs and the actual production cost 
figures, two ledger accounts are opened headed respectively 
(i) Cost of Sales account, and (2) Production Cost, or 
Estimated Cost account. These accounts have no connection 
with the rest of the ledger so far as the detail of bookkeeping 
is concerned. They are operated solely for the purpose of 
proving the estimated costs when the actual physical inventory 
is taken. 

The Cost of Sales account is charged with the total cost 
of sales as obtained from the summary of cost of sales (Form 
100), the offsetting credit being to Production Cost account. 
Thus the debit balance of the one is always in agreement with 
the credit balance of the other, and the figures may be elimi- 
nated from the general ledger without affecting the other trans- 
actions recorded therein. 

In charging the details of the inventories and the expendi- 
tures for the period to their proper general ledger accounts, 
care must be exercised to keep the original classification un- 
changed ; that is, the items charged to material, labor, or in- 
direct expenses accounts must be the same as those taken into 
account when making up the schedule of estimated costs. If 
any change in the classification of expenditures is made after 
the estimated costs are established, the validity of the proof is 
destroyed. 

Method of Verification 

The sum total of the items recorded in the inventory, 
material, labor, and factory indirect expense accounts include 
all charges applicable to factory operations. Therefore, when 
the credit balance of the Factory Production Cost account is 
deducted from the total, the balance should represent the value 
of the book inventory, i.e., its estimated value. When a 



ESTIMATING COST SYSTEMS 465 

physical inventory is taken, and priced at the figures of the 
schedule of estimated costs, its total amount should be in agree- 
ment with the book balance of the inventory if the total esti- 
mated costs are correct. Any difference between the two bal- 
ances is due to inaccuracies in the estimates. If the differ- 
ence is a large one and its cause cannot be located, it may be 
necessary to make the estimates in greater detail so that the 
origin of the discrepancy may be ascertained without much 
trouble. 

Verification of Material, Labor, and Overhead 
Estimates — Second Method 

Special Records Required 

When a proof is required of the estimated material, labor, 
and overhead cost, the article cost must be separated into its 
elements. To do this Forms 99 and 100 are ruled to show the 
estimated material, labor, and overhead costs of the articles to 
be produced and are supplemented with a record showing the 
analysis of the inventory, classified in the same way. The 
schedule of estimated costs and the record of the cost of sales 
are operated in the way already described. That is, the 
schedule furnishes the figures for pricing the cost of sales as to 
the material, labor, and overhead cost of each article sold. 
The total material, labor, and overhead cost of the sales are 
then credited to the ledger accounts, which are discussed in 
later sections. 

Analysis of Inventory 

The analysis of inventory (Form loi) is used to ascer- 
tain the estimated cost value of all product in the plant, divided 
into material, labor, and overhead. The ruling and headings 
of this form are exactly the same as those on the record of cost 
of sales, excepting of course the main heading. 



466 SIMPLIFIED COST-FINDING METHODS 

In making up the inventory the cost of any raw material 
in stock is entered in the material column. The cost of any 
articles in process is estimated as accurately as possible as to 
its three elements which are entered in their respective col- 
umns. Any errors in the pricing of the work in process at the 
beginning of the period will probably be offset by the same 
errors at the end of the period — unless there is a great differ- 
ence in quantities between the opening and closing inventories. 
The finished articles in stock are also priced as to their ele- 
ments of cost and entered in the same way. The totals of the 
analysis thus represent the material, labor, and overhead cost 
of the beginning inventory, which totals are used to open 
three corresponding accounts on the ledger. 

Operation of Ledger Accounts 

The Raw Material, Productive Labor, and Factory Over- 
head accounts already mentioned take the place of the Produc- 
tion Cost account used under the first method. Instead of 
entering the amount of the merchandise inventory in a single 
account on the general ledger, it is split up into its elements on 
the inventory analysis and from there posted to the debit of 
the three ledger accounts at the beginning of the period. 

During the period all expenditures for direct material 
are charged to Raw Material account, those for productive 
labor to the Productive Labor account, while at the end of 
the period Factory Overhead account is debited with the vari- 
ous indirect expenses classified in detailed accounts. In mak- 
ing the charges care must be taken to see that their classifica- 
tion is the same as that on which the estimated costs are based. 
If, for instance, certain items of material are classed as raw 
material in making up the estimates, and when consumed are 
charged as supplies to an expense account, the estimated ma- 
terial will be more than the actual material cost by the amount 
of material charged as supplies; and the reverse holds in the 



ESTIMATING COST SYSTEMS 



467 



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468 SIMPLIFIED COST-FINDING METHODS 

case of the estimated and actual overhead charges. Thus the 
value of the comparison between the predetermined and actual 
figures is largely destroyed. 

The debit side of the three above accounts shows the esti- 
mated cost value of the inventory at the l)eginning of the 
period, plus actual current expenditures. On the credit side 
appears the estimated cost of the articles sold during the 
period. This information, as under the first method, is gath- 
ered on the summary of cost of sales ; but as it is to be shown 
in greater detail, i.e., as to its elements, the material, labor, 
and overhead estimated cost of each sale is entered on the sum- 
mary and the three totals are then credited to their respective 
accounts — the three credit postings being in agreement with 
the total posted to the debit of the Cost of Sales account. 

Method of Verification 

As the balances of the Raw Material, Productive Labor, 
and Overhead accounts represent the book inventory classified 
in the same way as the beginning inventory, it is obvious that 
the book inventory should be in agreement with the physical 
inventory if the estimates are correct. A physical inventory 
is taken to verify the accuracy of the latter. Any difference 
between the two sets of inventory figures must be due to in- 
accuracies in the original estimates of cost, assuming that the 
physical inventories taken at the beginning and end of the 
period are accurate. If any element of cost in the book in- 
ventory exceeds the corresponding element in the physical in- 
ventory, this indicates that the predetermined costs have been 
underestimated as regards that particular element. If the 
reverse is true, the cost must have been overestimated. 

This method of proving the estimates in detail is a valu- 
able means of disclosing wastage of time, material, or other 
inefficiencies. If, for example, the actual cost of material 
proves to be greater than the estimated cost, while it is an 



ESTIMATING COST SYSTEMS 469 

established fact that the amount of material used should not 
have exceeded the estimated allowance, this is a clear indica- 
tion that material must have either been stolen or wasted. If, 
on the other hand, there is some doubt as to the reliability of 
the estimated material cost, and the actual cost proves the 
estimates to have been inaccurate, it may be advisable to am- 
plify the system by introducing material requisitions for the 
purpose of more closely checking the consumption of material. 
If the material costs are considerably underestimated, it is 
probable that leaks of considerable importance exist in the 
methods of handling and safeguarding it, or wastes may be 
occurring in the different processes throughout the plant. 

In the same way errors in the estimates for labor may 
disclose differences in the classifications of workers' time, and 
it may be discovered that labor which is really direct has been 
classified as indirect; or the discrepancies ma}^ disclose that 
productive workers are not keeping up to the time schedules 
on which labor costs are estimated ; or that the piece rates are 
vitiated by an excessive amount of spoiled or defective work. 
Also differences invariably appear between the estimated and 
actual overhead because in comparatively few cases are all ex- 
pense items included in the estimated overhead. 

In revising the estimates with the object of making them 
approximate as closely as possible to the actual cost, no method 
of revision will give the exact figures. If, however, the dift'er- 
ence between the book inventory and physical inventory as 
regards any of the elements be divided by the number of units 
of product manufactured during the period, the result will be 
approximately the amount to be added or subtracted from the 
original estimated cost of that element. This rule is fairly 
accurate if the output of the factory is uniform and conditions 
as to the material, labor, overhead items, and the production 
in general are fairly constant. Any radical changes in methods 
of routine or manufacture during a period might and prob- 



470 SIMPLIFIED COST-FINDING METHODS 

ably would cause wide discrepancies, unless the estimates are 
carefully revised in the light of the changes. But if the re- 
vision is methodically made at the end of each period, sooner 
or later the estimates should approximate the true costs, the 
accuracy, of course, largely depending upon the correctness of 
the predetermined figures as to the cost of each article — as 
established in the schedule of estimated costs in the first in- 
stance, 

Verification of Costs by Several Lots or 
Groups — Third Method 

Special Records Required 

The third development in estimated costs is the division 
of the factory output into two or more groups or lots the costs 
of which are separately predetermined and proved. For ob- 
vious reasons this development in detail necessitates the use 
of additional records, and thus the forms described under 
the preceding plan are supplemented by three more records — 
five in all being employed — which may be summarized as fol- 
lows: 

1. Schedules of costs, showing the article costs in each 

of the groups or lots of articles manufactured 
(Form 99, page 463). 

2. Records showing the consumption of materials by 

groups or lots (Form 57, page 267). 

3. Records analyzing the productive labor chargeable 

to each group or lot (Form 56, page 263). 

4. A distribution sheet showing the distribution of the 

factory overhead over the different lots manufac- 
tured in their proper proportion (Form 59, page 

273)- 

5. A cost of sales summary for each lot of prod- 

uct on which the estimated costs of each article 



ESTIMATING COST SYSTEMS 471 

sold within the lot are summarized (Form 65, 
page 287). 

While the general use of these records will be understood 
from the description in preceding sections and chapters, a de- 
tailed discussion of the accounts to which the figures collected 
on the records are posted will follow the discussion of the 
treatment of the elements of costs and the opening inventories. 

Raw Materials Costs 

As the material used in the manufacture of the various 
lots of articles must be separately recorded, a raw material 
storeroom may need to be operated — with a stores ledger to 
show receipts and withdrawals and requisitions to show for 
which purpose — i.e., for which lot of product — a particular 
kind of material is withdrawn from stores. If each lot of prod- 
uct were manufactured from a distinct kind of raw material, 
it would be possible to open a material account with each lot 
on the purchase journal or voucher register and charge the 
material purchases direct to the account. Provision would 
then have to be made for recording any transfers of material 
charged to one lot of product and used on another. Usually, 
however, much the same kinds of material would be consumed 
in the manufacture of all products, in which case a complete 
system of checking storeroom operations would then be neces- 
sary so that the consumption of material could be traced to 
the group of articles on which applied. 

Labor Costs 

Productive labor costs are classified in the same way as 
material costs so that the proper charges can be made to each 
lot of product. If certain employees work only on the pro- 
duction of articles within a group, it will be unnecessary to 
report their time daily as the whole of it may be charged to 
the labor cost of the group. But if some employees divide 



472 SIMPLIFIED COST-FINDING METHODS 

their time between groups, a simple system of labor reports 
must be introduced for the purpose of charging the workers' 
time to the groups on which they are occupied in proportion 
to the labor cost in each case. 

Overhead Costs 

The method of distributing the factory overhead over the 
different groups of articles may be based on either the produc- 
tive labor cost percentage or labor hours plan, as described in 
Chapter XI. As equitable a method as any and the one most 
commonly employed because of its simplicity is to base the dis- 
tribution on the percentage which labor cost bears to overhead. 
When pricing the articles within a group on the schedule of 
estimated costs and the analysis of cost of sales, the estimated 
overhead chargeable to each article would then be based upon 
a percentage of the estimated labor cost. Thus, any difference 
between the detailed estimated charges (for overhead on items 
sold within a group) and the total actual charge (to each 
group or lot) is revealed when the book inventory, as \Nill be 
explained presently, is compared with the actual inventory. 

Opening Inventory Analysis 

The merchandise inventory at the beginning of the period 
should be analyzed so as to show : 

1. The value of the total raw material in the store- 

room. 

2. The value of the work in process analyzed by groups 

so that the charges may be made to the group 
accounts kept with each lot of product. 

3. The value of the finished stock analyzed in the same 

way as the work in process. 

The analysis of the inventory in the way described fur- 
nishes the opening inventory totals which are the first entries 
to the ledger accounts. 



ESTIMATING COST SYSTEMS 



473 



Operation of Ledger Accounts 

The accounts opened on the ledger, under this method, 
for the purpose of comparing the estimated with the actual 
figures are : 

1. Raw Material account. 

2. A department account for each group of products. 

(If the factor}^ output is classified into twelve 
groups, twelve different department accounts 
would be required. ) 

3. A cost of sales account for each group. 

4. A sales account for each group. 

The total cost of all raw material, as shown by the mer- 
chandise inventory at the beginning of the period, is debited 
to the Raw Material account ; and the total cost of each of the 
various groups of work in process and finished stock items, as 
classified on the inventor}-, is debited to its department account. 

If a storeroom is operated and material is requisitioned, 
all purchases of material should be charged to the Raw Ma- 
terial account. All expenditures for productive labor during 
the period should be charged to a Productive Labor account. 
The expenditures for the different items composing the fac- 
tory overhead may be charged to one Factory Overhead 
account, or to each detailed expense account. If the charges 
are posted to detailed accounts, provision must be made for 
accumulating the total and transferring it to the Factory Over- 
head account at the end of each period. 

The Raw Material account is credited with the total ma- 
terial taken from stock, as shown on a summary of material 
requisitions (Form 57, page 267) — the offsetting debit con- 
sisting of the charges posted to the department accounts kept 
with each group of product. The Productive Labor account 
is credited with the total amount of productive labor applicable 
to the different departments as shown by the pay-roll analysis 



474 SIMPLIFIED COST-FINX>ING METHODS 

(Form 56. page 263) — offsetting debits being posted to the 
various department group accounts. Provision having been 
made for the distribution, Factory Overhead account is 
credited with the total amount of overhead — the offsetting 
debits being to each of the department accounts. 

Thus the department accounts kept with each group of 
products are debited with the beginning inventory and the 
current expenditures. They are credited with the cost of all 
sales of items within the group — which credit entry is com- 
piled on the summary of cost of sales (Form 65, page 287) 
showing the total cost of the various sales in each group. Any 
merchandise returned by customers should be calculated at its 
cost values and deducted from the cost of sales totals. Off- 
setting debit entries to the department credit entries are made 
to separate cost of sales accounts for each group of product 
sold. Provision for crediting the sales of each group to a 
separate account is made so that the gross profit or loss upon 
each of the department groups may be ascertained and a com- 
prehensive profit and loss statement thus prepared. 

Method of Verification 

As under the preceding methods, the proving of the re- 
sults in this case also depends upon the taking of a closing 
physical inventory which must be analyzed and priced in ex- 
actly the same way as the beginning inventory. A compari- 
son of the book figures with the amount shown by the actual 
inventory furnishes the basis for judging whether or not the 
estimated costs have been accurately predetermined. 

This method of proving the total cost of each item within 
separate groups may be developed or extended to cover a 
separate proof of the elements of cost in each case. To do 
this would entail the division of each department account into 
a material, lalx)r, and overhead account with each group. 



ESTIMATING COST SYSTEMS 475 

The merchandise inventories at the beginning and end of the 
period would also have to be analyzed as to the details of the 
material, labor, and overhead costs of each article by groups. 
In this way it would be possible to ascertain not only which 
group of articles was inaccurately estimated as to total cost 
but also to which element of cost the inaccuracies were due. 

Verification of Costs by Operating Departments — 
Fourth Method 

Special Forms Required 

The methods of estimating costs so far described are 
suited to manufacturing conditions where the operations or 
processes of manufacture are comparatively simple or few 
in number. When the product undergoes several processes 
or numerous operations and in consequence it is desirable to 
control the costs of different operating departments by com- 
paring the estimated figures with the actual cost, the 
estimating system may be further developed by predetermin- 
ing the cost of each process or each group of operations and 
controlling production by checking up promise with perform- 
ance in any desired detail. To do this, similar operations are 
grouped together and productive departments or production 
centers are formed around which to prove the items of cost. 
The special forms needed for compiling department cost are : 

1. Records of the estimated costs analyzed by operations 

or departments. These records give the style 
number, grade, and description of the article and 
provide money columns for compiling the cost of 
each department as well as the total cost. (Form 
99, page 463.) 

2. An analysis of the inventory, showing the value of 

the raw material stock and the departmental costs 
of work in process for each department separately 
and also the value of the finished stock. 



476 SIMPLIFIED COST-FINDING METHODS 

3. An analysis of purchases chargeable to the operating 

departments if material purchases are not charge- 
able to stores. (Form 50, page 246.) 

4. A summary of material requisitions supported by de- 

tailed material requisitions, for the purpose of 
ascertaining the total material cost to be charged 
to departments. (Form 57, page 267.) 

5. An analysis of the pay-roll, for the purpose of sum- 

marizing the productive and non-productive labor 
cost chargeable to each department. (This record 
is prepared from the detailed labor reports of em- 
ployees and proved with the pay-roll record. 
(Form 56, page 263.) 

6. An overhead distribution sheet, on which the items 

of factory overhead are compiled and distributed 
so that the totals chargeable to operating depart- 
ments may be obtained. (Form 59, page 273.) 

7. A production summary, for the purpose of ascertain- 

ing the credits for finished goods to be posted to 
the operating departments. (This summary is 
prepared from the detailed production reports of 
factory employees. (Form 60, page 274.) 

8. A cost of sales summary, showing the total cost of 

the articles sold and shipped and the cost of any 
merchandise returned by customers. (Form 65, 
page 287.) 

Ledger Accounts Opened 

The accounts opened for the purpose of proving the esti- 
mated department costs are : 

1. One Raw Material account 

2. Separate Work in Process accounts 

3. One Finished Stock account 

4. One Cost of Sales account 



ESTIMATING COST SYSTEMS 477 

Charges for Expenditures 

The Raw Material, Work in Process, and Finished Stock 
accounts are charged with the total value of the inventory 
items to which each relates, as shown by the beginning inven- 
tory. The merchandise purchases may be charged to Raw 
Material account if taken into the storeroom, but if some ma- 
terial goes direct to an operating department, provision may be 
made on the purchase journal or voucher record for charging 
the merchandise to the department which receives it. 

The department work in process accounts are charged 
with: 

1. The material used in each operating department as 
shown on either the purchase record when charged direct, or 
the summary of material requisitions (Form 57, page 267), 
prepared from the detailed material requisitions. The total of 
these charges is posted to the credit of the Raw Material 
account directly from the summary. Any transfers of mate- 
rial from one department to another should be recorded on a 
separate summary so that postings may be made to the debit 
or credit of the department accounts affected. 

2. The productive labor cost applicable to each operating 
department at the time the wages are paid; or provision may 
be made for summarizing wages in a Productive Labor ac- 
count, which is credited with the detailed charges debited to 
departmental work in process accounts. The analysis of the 
productive labor charges is made upon the pay-roll analysis 
(Form 56, page 263) which, as already stated, should agree 
with the pay-roll record. 

3. The factory overhead, the charge in each case being 
derived from the expense analysis sheet (Form 59) referred 
to, on which the various items of factory expense are distrib- 
uted. Any of the methods of expense distribution outlined in 
Chapter XI may be employed for the purpose of allocating the 
different items to departments. 



478 SIMPLIFIED COST-FINDING METHODS 

Thus, the operating department accounts which, as ex- 
plained later, are used as a basis for establishing the proof 
according to this plan are charged with : 

1. The cost of the items in process at the date of the 

beginning inventory. 

2. The charges of material, labor, and overhead affect- 

ing each operating department. 

Crediting Production 

As the manufacture of the product is completed, detailed 
reports are received by the office from the factory showing the 
disposition of the finished goods and, from this information, a 
production summary (Form 60, page 274) is prepared to 
ascertain the cost to be credited to the department accounts. 
The different kinds and quantities of articles produced are 
priced at their estimated cost as shown on the schedule of esti- 
mated costs. The totals to be credited to the department work- 
in-process accounts represent the estimated cost of each depart- 
ment's operations upon its actual production. After the credit 
entries are made, the balance of the accounts should represent 
the cost of any work in process at the end of the period. The 
total amount of the department credits is debited to the Fin- 
ished Stock account if all items are stored as finished stock. 

Recording Cost of Sales 

The Finished Stock account, as already stated, is charged 
with the cost of any finished stock on hand at the beginning of 
the period and with the cost of the articles produced during 
the period as shown by the summary (Form 60). As invoices 
are made out, provision must be made for recording the cost 
of the shipments (at their estimated price, be it noted) and to 
this end the estimated or predetermined costs may be entered 
upon either a copy of the invoice or the sales record (Form 
62). The quantities of the different articles shipped may be 



ESTIMATING COST SYSTEMS 



479 



summarized at the end of the period to obtain the total cost of 
sales, from which should be deducted the cost of any returns be- 
fore the postings are made to the ledger accounts. The total 
cost of the net sales (sales, less returns) is posted to the credit 
of the Finished Stock account if all the merchandise shipped is 
finished stock, the offsetting debit being to the Cost of Sales 
account. The balance of the Finished Stock account repre- 
sents the value of the book inventory of finished stock on hand. 

Method of Verification 

The predetermined costs are verified with the actual pro- 
duction figures by taking a physical inventory of the items of 
raw material, work in process, and finished goods, pricing 
them at the same values as in the opening inventory and com- 
paring the results with the book inventories. The advantage of 
this plan is not only that a test may be made of each of the 
classifications of the inventory separately, but that the cost of 
production may also be analyzed in any desired detail in the 
first instance and the results or actual figures compared with 
those first estimated and with the figures of previous periods. 
Discrepancies in the estimated cost will as a rule be discovered 
as the balances of the work in process accounts are com- 
pared with the actual quantity of the work in process on hand 
inventoried at its estimated cost. 

The control of costs by means of estimates of the depart- 
mental cost of the product, as here outlined, is particularly 
applicable to the manufacture of a complicated article in large 
quantity. While the system may be expanded to cover the 
manufacture of several kinds of product, it will be readily un- 
derstood that such a development would necessitate a corre- 
sponding increase in the number of accounts and records — so 
much so that the amount of detail would be almost as much as 
that involved in the operation of a job order system. 

It should be noted that the system may also be developed 



480 SIMPLIFIED COST-FINDING METHODS 

and its accuracy increased by the use of controlling accounts 
for different kinds of raw material and (if a variety of prod- 
ucts is manufactured) for different kinds of finished stock. 

Adjusting Differences in Inventory 

In the operation of every estimating cost system the most 
careful attention should be given to the make-up of the esti- 
mates in the first instance. The figures which appear on the 
schedule of estimated costs are those on which the pricing of 
the inventories is based. They constitute the cost sheets of the 
articles priced thereon, in that they state the article cost which 
is used for making the selling prices. Any errors in the esti- 
mated figures necessarily affect the inventory valuations and 
throw the whole system of proof out of gear. When discrep- 
ancies appear betw^een the values of the book and the physical 
inventories, it is important to adjust the estimated costs and 
revalue the inventories at the close of the period. As regards 
the discrepancies in the accounts of the current period, if 
the value of the physical inventory is found to be less 
than that of the book inventory, the costs have been 
understated and the difference constitutes a loss; as such it is 
transferred to profit and loss. If the physical inventory proves 
to be greater than the book inventory, the costs have been over- 
estimated and the difference constitutes a profit which may 
be credited to either profit and loss or cost of sales. How- 
ever, it should be clearly understood that when discrepancies 
show that the estimated costs have been incorrectly figured, 
the differences should not be charged to Profit and Loss ac- 
count before considering the effect on the closing inventories. 
If the estimated costs are incorrect, the inventory values based 
on them must also be incorrect. Therefore, any adjustments 
also affect the closing inventories, the value of which should 
be revised. 



CHAPTER XXIX 

UNIFORM COST METHODS 

The Advantages of Standard Methods 

The advantages of standardization when appHed to ma- 
chinery and manufacturing operations as a means of promot- 
ing efficiency of production are, today, well recognized. The 
same principle can with equal advantage be applied to cost 
methods. The establishment of uniform cost methods has 
been advocated, through manufacturing conventions, for the 
last fifteen years and in some trades uniform methods have 
been widely adopted. 

It would be well to correct at the outset a misunderstand- 
ing of the term "uniform cost systems." Such a definition 
implies in the minds of many that the system adopted by 
a particular trade or industry is uniform in all its details 
and ramifications. Such uniformity would be wholly im- 
practicable. A more exact term to use would be "uniform 
methods of cost-finding," the definition here implying that, 
while the methods are uniform, the records, forms, etc., neces- 
sarily vary to suit the needs of the individual case. 

There are many pertinent reasons for the adoption of 
uniform cost-finding methods, especially in trades where com- 
petition is keenly felt. While it is not possible under existing 
laws to establish uniform selling prices, there is no law to pre- 
vent uniform cost methods. The advantage of basing sell- 
ing prices on such uniform methods is that each manufac- 
turer in the same industry then knows that the price he 
asks for his product is a fair selling price. If he can- 
not compete with other concerns which figure costs and sell- 
ing prices in the same way, he is forced to conclude that his 

481 



482 SIMPLIFIED COST-FINDING METHODS 

costs are too high. In that case it is up to him to analyze 
closely his methods of manufacturing — whether or not he is 
buying his materials at the right prices or using the most up- 
to-date machinery and methods; whether his operating de- 
partments are properly balanced and his production is com- 
mensurate with his expenditures for labor and overhead; and 
so on. 

Many manufacturers are unable to figure how competing 
concerns can sell products similar to their own at a much 
lower price. There are, of course, certain articles called "lead- 
ers," which are sold at cost or less than cost for the purpose 
of influencing trade. Ignoring these articles, the only ex- 
planation of the fact that like articles are frequently sold at 
different prices by competing manufacturers is either that their 
methods of figuring costs or profits differ, or that the actual 
costs are much higher in one case than in another. 

Examples of Haphazard Methods 

Some years ago the secretary of a certain trade asso- 
ciation sent out a list of unclassified overhead items to mem- 
bers of the trade, with a request to classify them under the 
heads of factory overhead, selling, and administrative ex- 
penses. The replies were to be designated by numbers and 
presented at a forthcoming convention, without divulging the 
names of the concerns furnishing the information. 

Out of fifty replies received no two classifications of the 
various items of expense were in agreement. Furthermore, 
some omitted administrative expenses altogether from the 
cost, some added interest on investments, others did not, and 
several failed to include the salaries of the executives as part 
of the administrative expenses. This test clearly showed the 
need of uniformity in methods of cost-finding. Toward this 
goal much progress has been made in recent years — as is 
proved by the gradual abandonment of the old-style method of 



UNIFORM COST METHODS 483 

cost figuring of twenty years ago. This last method is illus- 
trated by the following experience. 

About twenty years ago a New York capitalist was anx- 
ious to find out how costs were figured in a New England 
factory. The general manager of the concern, when requested 
to explain his method, exhibited the following schedule : 

Style, 100 

Material Cost $2.00 per dozen 

Labor Cost 3.00 " " 

Total $5.00 " 

Add .50% 2.50 " 

Selling Price $7.50 " 

When asked, "Where are your overhead, selling ex- 
penses, and profits?" the reply was, "It is all included in the 
50%"; and in reply to the further question, "How much of 
that $2.50 is overhead, how much selling expense, and how 
much profit?" the answer was, "I never figured that out. I 
only know that, by selling the article at $7.50 a dozen, I 
realize a profit." 

Though no modern manufacturer works today in such 
darkness, it is a common practice to estimate material, labor, 
and overhead costs and add an arbitrary percentage for selling 
and administrative expenses and profit. A selling price is 
thus determined with no knowledge of how near any of these 
estimates are to the actual facts, 

Method of Standardizing Costs 

Every manufacturer should use his influence to bring 
about the adoption of uniform methods in his own trade. 
Such methods should be based on the fundamental principles 
of cost accounting, and should show the correct distribution 
of the elements of cost. Standardization is applicable to all 
systems alike — estimated, order, or process costs. 



484 SIMPLIFIED COST-FINDING METHODS 

In the standardization of methods the first steps are 
to estabhsh a uniform classification of the products of the 
trade and, so far as is practicable, a uniform classification 
of the operating departments. Different operating conditions 
may sometimes interfere with uniformity as between produc- 
tive and non-productive departments. 

Attention should next be directed to the classification of 
the direct material and direct labor items. Opinions some- 
times differ in the same trade as to which of the various classes 
of raw material are to be treated as part of the prime cost 
and which as an expense. Under some conditions, some ma- 
terial items may have to be handled as an indirect charge for 
the reason that it may be impracticable to treat them in any 
other way. 

The standardization of the productive labor costs should 
cover all processes and operations. Investigation may show 
that certain kinds of work are treated as productive labor cost 
in one plant, whereas in another the same costs are applied to 
the product in an indirect manner. 

The treatment of the factory overhead, selling expenses, 
and administrative expenses necessarily varies in different 
factories in the same line of business. The size of the or- 
ganization, location of the plant, method of marking the mer- 
chandise, method of obtaining material, the labor situation, 
and many other factors may lead to marked difference in the 
way overhead is handled. However, if this element of cost 
is to be as uniform as possible throughout the trade, the items 
composing it should be classified, where practicable, in the 
same way. 

The methods of distributing overhead to the vario'i.^ de- 
partments of the plant, and finally to the product, oftentimes 
differ greatly as between manufacturers in the same line of 
business. As the methods of distribution are in all cases ar- 
bitrary and some of the figures are estimated, uniform methods 



UNIFORM COST METHODS 4^5 

of treating overhead are difficult to adopt throughout a par- 
ticular trade. Nevertheless, the nearer a standard ideal is ap- 
proached, the fewer will be the variations in costs. 

Details to be Considered 

After the elements of cost have been broadly considered 
and disposed of, further details in connection with each should 
be taken up. One thing which often varies in different plants 
in the same industry is the method of handling the raw ma- 
terial — putting it into operation and accounting for it while 
in process. These are details which can usually be standardized 
without much difficulty. The items of scrap, waste, and 
spoiled material should also receive consideration. 

The standardization of the productive labor cost is some- 
times complicated by the use of automatic machinery. Where 
this kind of equipment is employed, large differences in cost 
calculations as between plants in the same industry are often 
revealed. Where specialized machinery has been devised 
within a plant for its particular requirements, information as 
to the cost of operating such machinery is usually extremely 
confidential in character. Therefore, under these circum- 
stances it is often impracticable to compare the labor costs of 
different plants with a view to the adoption of uniform meth- 
ods of calculation. The study of the productive labor items 
should include the method of paying wages and accommoda- 
tions afforded the various factory employees. 

Where the manufactured articles undergo different proc- 
esses, it is impossible to compare the costs unless they are 
analyzed departmentally. In making the analysis, all the items 
of overhead which apply directly to departments should be so 
charged, leaving only a residue of general operating expenses 
to be prorated equitably over all departments. 

It should be borne in mind that it is not essential for 
the uniform cost methods adopted by a given trade to be 



486 SIMPLIFIED COST-FINDING METHODS 

Strictly scientific and accurate. Their main object and the chief 
advantage of their use is that all costs may be figured in 
precisely the same way. Any mistakes made in determining 
the selling price would then be the same throughout that par- 
ticular trade, in which event unfair and ignorant competition 
would cease despite the faults or deficiencies in the methods of 
cost-finding adopted. 

While the value of applying uniform cost accounting 
methods to every trade cannot be questioned, it must be ac- 
knowledged that it is always a difficult matter to bring the 
manufacturers of a particular hne together and induce them to 
adopt uniform methods as a body. If, however, such methods 
should be contemplated by any body of manufacturers, the cost 
of studying conditions and devising an appropriate system 
should be undertaken and carried out by a committee appointed 
by the association, with full power to act. If this matter is left 
with the members of the trade individually, little progress will 
be made, for the reason that most manufacturers believe that 
it is the "other fellow" who is not correctly figuring his costs. 



Part VII— Cost-Plus Contracts 



CHAPTER XXX 

RECOMMENDATIONS OF INTERDEPARTMENTAL 
COST CONFERENCE 

Work of Conference 

During the summer of 191 7 an Interdepartmental Con- 
ference on Uniform Contracts and Cost Accounting Definitions 
was organized at Washington to consider and make recom- 
mendations concerning the matters named in its title. The 
conference, which consisted of delegates from the Departments 
of War, Navy, Commerce, the Federal Trade Commission, and 
the Council of National Defense, published a pamphlet under 
date of July 31, 191 7, making certain recommendations in 
connection with contracts and costs. The author, who at that 
time was chief of the Division of Cost Accounting of the 
Department of Commerce, had the honor of being chairman of 
the conference from the time of its inception until the report 
was made. 

It is not the author's intention to present any arguments 
for or against the usual terms of government contracts. The 
purpose of this chapter is to deal particularly with cost items 
as applied to cost-plus contracts. To understand their appli- 
cation, however, it is advisable for the reader to be familiar 
with the report of the Interdepartmental Cost Conference on 
Contracts, and therefore the recommendations issued by its 
delegates are herewith reproduced, 

487 



488 COST-PLUS CONTRACTS 

Recommendations — Their Object 

"These recommendations are intended to suggest to con- 
tracting officers some of tlie broad legal and equital)le points 
involved in war contracts, and to express the preference of 
the conference for a straight purchase-and-sale contract at 
a fixed price, since it is simpler in terms, easier to work under, 
and generally speaking, productive of better and c^uicker re- 
sults. The British Government, after several years' expe- 
rience, has discarded the cost-plus contract plan and adopted 
the straight purchase-and-sale contract in every instance pos- 
sible. It is not proposed to go into the large question of policy 
involved in attempting to prevent demoralization of markets 
by excessive competition. Suffice to say, that the Govern- 
ment can furnish material and component parts under either 
a fixed-price or a cost-plus contract, and thus protect conditions 
by purchases in bulk. Recommendations and brief discus- 
sion follow. 

Fair Terms and Fixed Prices 

"It is recommended that, in every instance where fair 
terms can be obtained, contracts should be in the form of 
straight purchase-and-sale contracts at fixed prices. 

"In the determination of 'fair terms' lor fixed price con- 
tracts, the contractor, in so far as possible, should be required 
to state the cost and other factors upon which his price is 
based; such representations to be the subject of investigation 
by the contracting officer prior to the final execution of the 
contract, and if found to be incorrect, the price to be adjusted 
accordingly. 

"What constitutes 'fair terms' can be arrived at only by 
consideration of many factors, such as : 

1. The quality and quantity of the articles purchased. 

2. Whether or not the plant is adaptable to business 

other than war business. 



INTERDEPARTMENTAL COST CONFERENCE 489 

3. The duration of the job and the length of time the 

contractor's plant and capital will be tied up. Also 
the amount of capital tied up in comparison with 
the particular output contracted for. 

4. The possibility of fluctuations in material and labor 

costs with attendant risk to the contractor. 

5. Loss in commercial business by taking Government 

work, which must be given precedence ; disarrange- 
ment in plant organization and labor conditions. 

6. Comparison with prices of other manufacturers, com- 

petitive bidding, etc. 

7. The prosperity of the trade and of the particular con- 

tractor. 

"In certain instances where the article is standard, or- 
dered in bulk, deliverable promptly, a profit amounting to 10% 
of costs is unreasonably high. In other instances where the 
quality of the job is high, the quantity small, or where the job 
ties up the contractor's plant and capital for a long period of 
time, or where the material and labor risk is considerable, or 
for other similar reasons, such 10^ profit may well be un- 
reasonably low. 

"Again, in agreeing upon 'fair terms' the following fac- 
tors should be considered, any or all of which greatly aid the 
contractor and should tend to lower the price. 

1. United States to supply material or component parts. 

2. United States to readjust price in the event of fluc- 

tuations in price of material or component parts 
resulting in increased costs. 

3. United States to readjust price in the event of labor 

disputes resulting in increased labor costs. 

4. United States to make frequent payments to reim- 

burse the contractor for expenditures for material, 
component parts, or the like. 



490 



COST-PLUS CONTRACTS 



"To skimp fair terms will inevitably tend to cause con- 
tractors to lose interest in production and disturb general 
business conditions. Fair terms can only be determined by 
consideration of these general principles as well as the special 
factors indicated above that may apply to the particular pro- 
duction contracted for. 

Form of Purchase-and-Sale Contract 

"It is recommended that a standard form of straight pur- 
chase-and-sale contract at a fixed price be adopted for use 
wherever practicable. It should contain clauses which will 
deal with the following subjects : 

1. Method of deHvery; storage of production; shipment 

to point designated. 

2. United States to pay for raw material when delivered 

to contractor. 

3. United States to have the right itself to supply ma- 

terial and component parts. 

4. United States to adjust price on increased material 

costs above estimated costs. 

5. United States to adjust price on increase in labor 

costs. 

6. Liquidated damages. 

7. War clause termination. 

"Although a straight purchase-and-sale contract for a 
fixed price adjusted as indicated is greatly to be preferred^ 
nevertheless in numerous instances the United States will be 
obliged to obtain production by paying for the entire cost of 
the same and in addition a fair profit to the contractor. 
Such cost-plus contracts may be necessary under the following 
conditions : 

I. Where the production is novel and the contractor has 
had no past experience upon which to base a price ; 



INTERDEPARTMENTAL COST CONFERENCE 



491 



for example, steel helmets, large caliber guns and 
shells for same, aeroplane motors, and the like. 

2. Where the production involves difficult and compli- 

cated manufacturing effort subject to changing 
plans and specifications, or wide fluctuations in 
material costs; for example, steel and wooden 
ships, aeroplanes, optical glass-work, and the like. 

3. Where the contractor, though deserving of confidence, 

lacks sufficient working capital and plant equip- 
ment to carry through the job. 

4. Engineering or building jobs for which the cost-plus 

contract has for many years been standard. 

Relations Established by Contract 

"It must be borne in mind that a cost-plus contract estab- 
lishes a relation of trust between the United States and the 
contractor, in which the contractor is legally responsible at 
all times to work in the interest of the United States and re- 
ceive no profit beyond that definitely specified in his contract. 
For all excessive costs, hidden profits in the form of depre- 
ciation, overhead, discounts, and the like, the United States 
may refuse to pay, or, if the contractor has thereby profited, 
may sue and recover. Practically, however, the interests of 
the United States and the contractor are inevitably opposed 
if the profit is based upon a percentage of cost. The tempta- 
tion is great to the contractor to inflate his own costs, as well 
as the costs of subcontractors, and the task of the United States 
is difficult and burdensome in checking and determining proper 
costs. 

Fixed Profit Plan 

"It is recommended that in cost-plus contracts a fixed 
profit of a definite sum of money per article be agreed upon 
instead of a percentage of cost. 



492 COST-PLUS CONTRACTS 

"Such fixed profit can be arrived at by taking a percent- 
age, say io%, of the estimated cost of each article or the entire 
job. In instances where estimates of cost are impracticable, 
it becomes of paramount importance to choose a contractor 
in whose integrity the United States may have the fullest con- 
fidence. Where a fairly close estimate can be made of the cost 
of the article or job. upon the completion of the contract the 
actual cost can be checked against the agreed estimate and the 
contractor permitted to share in the saving, or be charged with 
part of the excess of cost, depending upon the outcome. Such 
an arrangement stimulates the contractor to save costs and 
time, because the two go together. This cost-plus adjustable 
fixed-profit contract unquestionably affords the Government 
the greatest protection in cost-plus contracts. Great care 
should be used in fixing the estimated price, which, if too high, 
may result in giving the contractor a profit entirely unde- 
served. 

Adjustment of Fixed Profit 

"It is recommended that in cost-plus contracts the fixed 
profit agreed on be subject to adjustment, so that the contrac- 
tor may share in the saving of, or be charged with part of the 
excess of, actual cost over estimated cost. In some instances 
the contractor may agree to pay for all excess over a certain 
named figure of cost, and the advantage to the United States 
in such an arrangement is too obvious for comment. 

"In the determination of costs, direct labor and direct 
material are easily ascertainable; it is the indirect charges to 
the job, overhead, and depreciation, that present difficulties. 
To contract to pay a proper charge for overhead and deprecia- 
tion leaves the door wide open for endless discussion, and it is 
suggested that wherever possible the amount of these items 
be tentatively fixed in advance, based on definite representa- 
tions of the contractor as to the amount of fixed capital assets 



INTERDEPARTMENTAL COST CONFERENCE 493 

to be depreciated and the estimated overhead. Such amounts 
should always be subject to revision in case such representa- 
tions prove to be incorrect. This puts it up to the contractor 
to make an honest representation and provides ample opportu- 
nity to check the same. 

Standardized Forms and Methods 

"It is of the utmost importance that standardized forms 
of contract as well as standardized methods of determining 
costs be applied to this class of contracts. Such standardiza- 
tion will produce clarity in the relation between the contractor 
and the United States and will fix precedents of construction 
for certain clauses and terms. Standardization will also af- 
ford great protection to the United States, not alone presently 
in determining points of difference but also in Court of Claims 
suits that may arise. It is recommended that a standard form 
of cost-plus contract be adopted for use wherever practicable. 
As conditions necessitate changes, the form of such standard 
contract can be changed to suit. 

Summary of Recommendations 

"i. It is recommended that in every instance where fair 
terms can be obtained, contracts should be in the form of 
straight purchase-and-sale contracts at fixed prices. 

"2. It is recommended that a standard form of straight 
purchase-and-sale contract at a fixed price be adopted for use 
wherever practicable containing special war clauses. 

"3. It is recommended that in cost-plus contracts a fixed 
profit of a definite sum of money per article be agreed upon 
instead of a percentage of cost. 

"4. It is recommended that in cost-plus contracts the fixed 
profit agreed on be subject to adjustments, so that the con- 
tractors may share in the saving of, or be charged with part 
of the excess of, actual cost over estimated cost. 



494 COST-PLUS CONTRACTS 

"5. It is recommended that a standard form of cost-plus 
contract be adopted for use wherever practicable." 

Normal Costs versus Total Costs 

As the term "normal costs" is used in many government 
contracts, the attention of the reader is particularly called to 
the definition of its meaning as frequently employed in the 
following pages. 

Normal costs are based on an estimated cost per unit. 
Sometimes material is used as the basic figure and some con- 
tracts provide that the normal cost may either be reduced or 
raised by any change in the price of material. The intention 
of this proviso is that the contractor shall suffer neither loss 
nor gain by changes in the market price of material. Many 
contracts allow 10% on cost with the proviso that if upon the 
completion of the job the cost per unit exceeds the estimated 
normal cost, 20% of the amount of such excess cost shall be 
deducted from the amount of profit; on the other hand, if the 
cost falls below the estimated normal cost, the contractor shall 
be entitled to receive, in addition to the regular 10%, 20% 
upon the amount of the difference between such normal cost 
and the actual cost of the delivered units. In addition to this 
explanation, a contract usually outlines the elements that are 
to enter into the normal cost. 

In contracts based on normal cost a clear distinction 
should be drawn between normal and total costs. While the 
normal costs would contain all the usual elements of manu- 
facturing cost, the total costs would include not only the 
normal but any special charges such as those incurred by the 
purchase of special facilities required for the manufacture of 
a particular product or incurred in connection with experiments 
and preliminary expenses. This matter has an important bear- 
ing on the cost of any product when a change is made from 
a cost-plus to a fixed-price basis. While the normal costs may 



INTERDEPARTMENTAL COST CONFERENCE 



495 



and usually do remain practically the same, the total costs 
would be reduced considerably inasmuch as the special facili- 
ties, experimental and preliminary expenses incurred at the 
beginning of the contract would not be incurred a second time. 
In gathering cost statistics, therefore, the normal costs should 
always be kept separate and distinct from the total costs of 
the contract. 



CHAPTER XXXI 

COST-PLUS CONTRACTS — MATERIAL, LABOR, 
AND EQUIPMENT ITEMS 

General Consideration of Terms of Contract 

As the general principles of cost-finding and definitions of 
standard cost items have been covered in Chapters I, II, and 
III, the discussion in the following two chapters is largely 
confined to the distribution of cost items according to the terms 
of cost-plus contracts. Not all items are enumerated, for the 
reason that some are so technical in character or are so specifi- 
cally related to a particular contract as to be of little general 
interest. Those that are taken up are such as illustrate what 
the author believes to be the correct interpretation of the 
terms of cost-plus contracts, whether these be fully expressed 
or only implied. These interpretations are not to be applied 
to any subcontracts of the prime contractor other than strictly 
cost-plus subcontracts. The terms of the latter are often based 
on material and labor time, i.e., on the cost of material and 
a set price per hour of labor time, which hourly rate includes 
all overhead and the profit on the subcontract. 

While the classification of the items in the following chap- 
ters aims to group those of a like nature together, it will be 
noted that their treatment under cost-plus contracts often dif- 
fers from their treatment under ordinary commercial condi- 
tions. In government cost-plus work, the costs are interpreted 
according to the provisions of the contract. This sometimes 
lists a certain number of classifications and refers in addition 
to the pamphlet "Definition of Costs" issued by the Chief of 
Ordnance, War Department, under date of June 27, 1917. 

496 



MATERIAL, LABOR AND EQUIPMENT 497 

Need of Special Rulings 

In all cost-plus contracts many items of cost cannot be 
foreseen before work begins, either by the contractor or the 
buyer. Therefore, a large number of special items are dis- 
cussed in the following pages. These items may apply to any 
exceptional conditions which the terms of the contracts do not 
cover. For instance, in some contracts special facilities may or 
may not be allowed as costs ; in others, interest on investment 
and working capital or interest on money borrowed by the con- 
tractor to carry on the cost-plus work is allowed; again, the 
interest may be limited to that on working capital or on money 
borrowed by the contractor to finance the purchase of material 
to be used on cost-plus work; or interest may be eliminated. 

The intention here is not to make definite rules to cover 
all cases, but to illustrate, so far as possible, the treatment of 
costs under cost-plus contracts wherever the contract itself 
does not specifically take care of the items in question. Be- 
fore proceeding with the discussion, the author wishes to state 
emphatically that so far as is consistent with the forms of cost- 
plus contracts, the distribution of costs between the contractor 
and the buyer or contractee has been made in precisely the 
same manner as it would have been made had the contractor 
called him in to make the distribution on straight-purchase 
price contracts. Also, the opinions expressed herein are not 
made in any official capacity, but are the personal opinions of 
the author. 

Betterments and Equipment 
Treatment of Additions and Special Facilities 

Expenditures for special facilities, which usually are in 
the nature of a betterment, may be charged as cost when they 
are exclusively employed on cost-plus work, providing that the 
contract authorizes the charge. In all other cases they should 



4^8 COST-PLUS CONTRACTS 

be charged to a Betterment account and be subject to deprecia- 
tion, of which the cost-plus contracts would bear their propor- 
tionate share. 

Where betterments, additions, or other special facilities 
are charged ioo% to cost-plus contracts, the following facts 
should be taken into consideration : 

1. Where the betterment, addition, or other facility is 

manufactured in the plant and not purchased from 
outside, and may be removed when work on the 
contract is completed without injury, such cost 
should be allowed with profit under a cost-plus con- 
tract. 

2. Where the betterment or other facility is attached 

to a machine or a part of the building or connected 
with a part of the plant in such a way that its re- 
moval would practically destroy its residual value, 
it may be subject to reimbursement or compensa- 
tion without profit. 

Unless clearly stated in the contract itself, expenditures of 
the above character should not be treated as a part of the 
normal costs, but should be reimbursed and profit should be 
added only when the betterment is manufactured in the plant. 
All purchases of betterments, where provided for in the con- 
tract, should he reimlxirsed without profit. Some contracts 
do not allow profit on increased or special facilities whether 
purchased or manufactured in the plant. 

Where the betterment is used exclusively for the benefit 
of the cost-plus contract and cannot be used for any other 
purposes in the contractor's business, either before or after 
the cost-plus contract is completed, it should be subject to reim- 
bursement with profit. On the other hand, where the article 
can be used for other purposes, it may become either an asset 
of the contractor subject to depreciation, or under certain 



MATERIAL, LABOR AND EQUIPMENT 499 

conditions a part of the overhead ; or again, a certain arbitrary 
percentage of its value may be charged to both the cost-plus 
and other contracts. It should always be clearly understood 
that wherever the government pays the full price of any arti- 
cle, it becomes United States property, 

Treatment of Fixtures and Special Equipment 

When special equipment is purchased for the needs of a 
contract, the method of charging it should be given careful 
consideration. For instance, the fixtures employed in staging 
shoring, and blocking ships may be used in the construction 
of several vessels. Such equipment, therefore, should not be 
written off to expense when purchased, which custom is fre- 
quently followed in ship yards. While it is true that its de- 
preciation would be considerably higher than on most equip- 
ment, nevertheless it is still as necessary a part of the ship- 
building plant as the wagons, piles, planking, etc., are to a 
building contractor doing ordinary construction work. The 
opinion is here offered that all expenditures of this character 
should be charged to cost-plus work as depreciation. 

Office Furniture and Fittings 

Purchases of office furniture, filing cabinets, typewriters, 
addressing machines, copying machines, adding machines, and 
supplies, which are to be used solely in connection with work 
on cost-plus contracts, should not be treated as normal costs 
but as a cost subject to reimbursement without profit. 

Rebuilding, Renovating, and Equipment Charges 

Any expenditures on rebuilding, alterations, renovating, 
and removing machinery and equipment, which are incurred 
for the benefit of the plant as a whole and which cannot be 
considered as an asset increase, should be treated as a deferred 
overhead cost unless expressly provided for in the contract 



500 COST-PLUS CONTRACTS 

as increased facilities, in which case the cost may be allocated 
directly to the contract on which incurred. If the expense in 
question is a direct overhead charge to a specific contract, it 
should not be charged to general overhead for distribution over 
all contracts covering items of the same character. Under these 
circumstances several accounts or classifications should be 
made, namely, one account chargeable directly to cost-plus con- 
tracts, another chargeable directly to other contracts, and a 
third to be a general overhead item. Inasmuch as certain ex- 
penses of this kind may be incurred, at times both for the bene- 
fit of the cost-plus contracts and other contracts, no share of 
expenditures for the adjustment of equipment, other than that 
directly affecting cost-plus contracts, should be charged thereto. 
When changes, improvements, or additions, whether of 
a permanent nature or for temporary use, are to be made to 
machinery, plant, or equipment, the questions of how the cost 
is to be applied and whether the additions are to belong to the 
contractor or the buyer should be determined before the cost- 
plus work begins. 

Freight or Express on Equipment 

If any equipment used on the contract is provided by the 
contractee or buyer, all freight and express charges and the 
expenses of its installation are chargeable ioo% as part of 
the overhead cost of the contract work. If, on the other hand, 
the contractor himself buys equipment or machinery, the 
freight, express, and other expenses should be charged to 
plant investment and not to overhead. 

Setting up Machines 

Any costs incurred in setting up machines are chargeable 
directly to the specific contract for which the machinery is 
installed. If a machine works on various contracts, the charge 
would be to overhead. 



MATERIAL, LABOR AND EQUIPMENT 501 

Monorail System 

A conveyor might be installed strictly for the needs of 
cost-plus contracts. If so situated that it could be used on 
ordinary commercial work either before or after the comple- 
tion of the contract, it would be an addition to the plant assets 
and subject to depreciation. Should the system be so placed 
that it could not be used on cost-plus work without removal to 
another part of the plant, then the estimated cost of this re- 
moval should be ascertained and should be charged 100% 
as overhead against the contract for reimbursement with 
profit, but not to be included as normal cost, 

Installing Workmen's Washing Facilities 

Items of such character as workmen's washing facili- 
ties should be charged as deferred overhead expense and 
treated in the same manner as betterments. 

Housing of Laborers 

Expenses incurred in connection with the housing of 
workmen (excluding the purchase of land, the construction 
of buildings, or other expenditures of an asset nature) may be 
treated as overhead, from which any income received from 
such assets should be deducted. The asset expenditures may 
be amortized if authorized by the buyer. 

Repairs, Renewals, and Replacements 

Method of Treatment 

Repairs, renewals, and replacements sometimes require 
special treatment. If the buyer has supplied the contractor 
with machinery or has reimbursed him for its purchase or for 
the erection of buildings, the ownership of such property is 
vested in the buyer. Wherever such expenditures are made di- 
rectly and only for cost-plus work, they become a direct charge ; 



502 



COST-PLUS CONTRACTS 



when used for commercial work as well, the charge should be 
made to overhead. The cost-plus contract should bear no part 
whatever of the cost of the contractor's machinery if used by 
him for commercial work only. 

Wherever replacements of machinery are made necessary 
by cost-plus work and a purchase is made, the contractor is 
entitled to reimbursement, but profit should not be added. If 
any laborer is employed in connection with replacements, he 
should be allowed a profit on the labor. If the machinery is 
manufactured, ^ profit should also be allowable on material. 

Extraordinary Repairs 

A distinction should be made between the ordinary up- 
keep of a plant, consisting of the repairs and replacements due 
to wear and tear, and extraordinary repairs which may be 
regarded at times as a betterment. Changes in equipment or 
the moving and rearranging of a plant are often included as 
ordinary repairs. Betterments such as putting in extra doors, 
putting on a new roof, making material changes in the con- 
struction of a building, etc., are charged at times to an ordinary 
repair account but should be charged as extraordinary repairs. 

Where betterment items are not charged against deprecia- 
tion reserve, and the value of an equipment is held intact as an 
asset, subject only to the regular rates of depreciation, and the 
betterment in question does not materially enhance the value 
of the equipment, such items may be chargeable as extraordi- 
nary repairs. These should constitute a deferred charge, and 
be written off or amortized during a period of from one to 
three years. The amount written off should form a part of 
the overhead expense, unless specially authorized and approved 
by the buyer and used only in the interest of his contracts. In 
this case, the amount would be chargeable to such contract 
as direct expense, providing the contractor does not in any 
way participate in the value of such items. 



MATERIAL, LABOR AND EQUIPMENT 503 

Material and Supplies Items 
Material Cost 

Cost-plus contracts usually specifically state that the ac- 
tual cost of material only shall be charged thereto. Should the 
contractee or buyer, for instance, buy raw material at a bar- 
gain, he could not, under the terms of the contract, charge the 
contractor for a greater sum than was paid for it; and on the 
other hand, the contractor who bought material under the 
market could not charge the market price to cost-plus contracts. 
The actual purchase price in each case would have to be used. 

Supplies 

Supplies are usually regarded as an overhead expense, 
but more accurate costs would be obtained if they were divided 
into direct supplies chargeable against current contracts and 
indirect supplies chargeable to overhead, when the latter could 
not be allocated to any particular contract, 

Pricing of Material and Supplies 

Where material is bought at different times and at vari- 
ous prices and it is not practicable to use a definite purchase 
figure, an average price should be computed on all material 
put into process, whether owned by the buyer or the contractor. 
If the average price does not balance correctly at inventory 
periods with the value of the amount on hand, any discrepancy 
should be adjusted, when possible, by charging or crediting 
the contract involved; if this cannot be ascertained, the charge 
or credit should be made to overhead expense. 

Shortages, Overs, and Obsolete Material 

The payments made by the contractor for purchases 
should be recorded and charged to the contracts affected. To 
take care of any shortages and overs, it is advisable to open 



504 COST-PLUS CONTRACTS 

an account called ''Over, Short, and Damage," charging it 
with shortages and crediting it with overs or any claim paid 
for shortages. The balance of the account would be debited 
or credited to either overhead expense or the contract affected, 
as the case might require. 

Obsolete stores should not be included as a cost unless 
they represent losses on purchases to be used on cost-plus 
work and made since the date of the contract. 

Inventory Adjustments 

When any difference between the book and the physical 
inventory of materials and supplies which have been used on 
cost-plus contracts cannot be located, such difference may 
either be charged or credited to overhead expense, as the case 
may require. This rule should apply only to normal or small 
differences, as any large discrepancy would necessarily have 
to be accounted for. 

Drayage 

While drayage is an ordinary item of expense, a contract 
for material may state the purchase price plus the cost of 
drayage. Therefore it would seem that the word "drayage" 
should be interpreted so that no misunderstanding may arise in 
its application to cost. The recognized commercial use of 
this term implies the hauling of freight or express from or to 
a depot, but it does not cover hauling of every description, 
such as the transfer of material from one part of a plant to 
another. 

Packing and Packing Supplies 

Boxes, lumber, nails, containers, strapping, and miscel- 
laneous packing supplies as well as the packing labor incurred 
on cost-plus work may be included as part of the overhead, 
which should receive credit for any salvage. 



MATERIAL, LABOR AND EQUIPMENT 505 

Transfers of Inventory Items Between Factories 

When for the sake of convenience raw material is trans- 
ferred from one contractor to another working on cost-plus 
contracts, the purchase price only should be charged. For 
instance, it would clearly be unfair to the United States Gov- 
ernment for Contractor A to add 10% to material transferred 
from Contractor B, even if A's contract allows this 10% on all 
material purchases used on government work. Contractor 
B naturally expects his 10%, and if A charges 10%, then 
10% would be charged twice on the same material. There- 
fore the government would be penalized to the extent that it 
could go into the open market and buy the same material sup- 
plied to Contractor B for the price paid by Contractor A. 
On the other hand, when part-finished or finished components 
are transferred from one contractor to another, it is logical 
for the contractor making the shipment to add his 10% profit 
inasmuch as he has used his plant and facilities in their manu- 
facture. The receiver of the parts would also add 10% profit 
in view of the fact that the components represent a purchase 
which will be used in manufacturing. 

It should be noted that 10% is used as an illustration 
but it is not to be assumed that all cost-plus contracts are 
necessarily based on 10% plus. 

If the United States Government purchases material and 
components at a given price from a foreign government with 
unfinished contracts in this country, the price of the materials 
or components may include interest or carrying charges. This, 
however, does not add to their value. Therefore, the con- 
tractor who takes over such materials and parts should add 
10% to the purchase price only and not to carrying charges. 

Spare Parts 

In some cost-plus contracts a fixed profit is allowed on 
each unit of production. If the contract, as frequently hap- 



5o6 



COST-PLUS CONTRACTS 



pens, covers the manufacture of certain machines, spare parts 
will probably be required from time to time and the contract 
may not specify definitely their number or kinds. For in- 
stance, a clause in a certain contract provides a profit of $25 
for each machine delivered, 90% of this amount, namely 
$22.50, being payable upon delivery and acceptance, the re- 
mainder upon the completion of the contract. Another clause 
of the same contract provides that upon the delivery of spare 
parts which amount to 30% of the total cost of each completed 
machine, $7.50 profit will be added. It is noted that this 
is for the same proportion as the $22.50 in the first-mentioned 
clause is to $25, or 90%. In other words, the same percent- 
age is held out for final payment upon the completion of the 
contract for spare parts as for the completed contract for the 
machine. 

In order to figure out the amount due the contractor on 
spare parts, it is necessary to consider the following: 

1. Ascertain the total cost upon which a profit of $25 

is given. 

2. Calculate the percentage of the spare parts cost to the 

total cost. 

3. Calculate the percentage of $25 profit to the total cost. 

4. Use this last percentage to multiply the cost of the 

spare parts in order to obtain the amount of profit 
to be paid on the same, 90% — which, however, 
is all that would be payable until the completion 
of the contract. 

In the above example care should be exercised to see 
that the accumulated profit payable on the spare parts does not 
at any time exceed $22.50, which represents the profit payable 
on the completed article; taking into consideration, however, 
that this will apply where the spare parts represent an equal 
number of completed articles or the proper proportion thereof. 



MATERIAL, LABOR AND EQUIPMENT 507 

Tools 

Distinction Between Tools and Machines 

Manufacturers have not always a clear conception of the 
correct classification of tools by their names, and this results 
in confusion when charging their cost to contract work. A 
machine is sometimes classed as a tool, and vice versa. A 
machine is always an asset when a pulley or belt is attached 
to it for the purpose of running it by power of some kind 
and without which it cannot be operated. Machinery which 
is not operated by a pulley or belt is a tool of some kind. Gen- 
erally speaking, tools used in actual operation are classified as 
small tools and those used for the purpose of holding another 
tool in place are classified as machine tools. This applies 
to tools generally, excepting chucks, fixtures, gages, trans- 
missions, etc. 

All attachments, holders, etc., which are bought with a 
machine and form part of its first cost should be regarded as 
assets in connection with the machine. This classification, 
however, does not include special holders and attachments 
exclusively used for special work and which at the end of 
such work become useless. 

Asset Tools and Perishable Tools 

For cost purposes tools may be divided into two classes : 
namely, asset tools and perishable tools. These may be sub- 
divided in each case into standard tools and special tools. 

All asset tools — other than any special tools used on 
special work and chargeable under the terms of a contract 
directly to such special work — should be treated as an asset 
of the contractor, subject to depreciation. Perishable tools 
of a standard nature should be charged as an overhead ex- 
pense, for the reason that it is impracticable to limit their use 
on any particular contract. Only those perishable tools which 



5o8 COST-PLUS CONTRACTS 

are special and cannot be used in connection with any other 
contract work are chargeable to such special contracts. 

Scrap Value of Tools 

Care should be taken to see that a contract receives its 
proper proportion of the scrap value of all tools used upon it. 
If they are asset tools, the cost of their repairs and mainte- 
nance should be charged and their scrap value credited to over- 
head. In the same w^ay, if the cost of any tools has been 
charged to overhead, their scrap value should also be credited 
thereto. If a special contract is charged with the full value 
of any tools, it should be credited with ioo% of their scrap 
value. 

Classification of Tools 

While the general distinction between an asset and perish- 
able tool is based on the life of the tool, it is somewhat difficult 
to determine whether it is an asset or of a perishable nature 
from its name, as the wear of a tool depends entirely upon 
the material from which it is made and the use to which it is 
put. An attempt should, however, be made to classify tools 
into several divisions for the purpose of determining depre- 
ciation rates. For instance, tools which are quickly worn out 
and which last from a few hours to not more than two months, 
would all be chargeable either to overhead or to a particular 
contract and would therefore have no depreciation rate. Tools 
lasting from two months to a year could be classed as asset 
tools and depreciated at the rate of io% per month. Tools 
lasting from two to three years should be charged off at the 
rate of 33 1/3% per year; but all tools which are part of a 
machine, as stated on the preceding page, should be in- 
cluded in the rate of depreciation allowed on that particular 
machine. 

The correct classification of a tool, either as an asset or 



MATERIAL, LABOR AND EQUIPMENT 509 

as an item of a perishable nature, is important in connection 
with charging its cost to a particular contract — unless the 
value of the tool can be ascertained at the end of the contract 
in question. Therefore, it is recommended that an inventory 
of the valuation of tools should be taken at the end of any 
cost-plus contract and the value of the inventory credited in its 
proper proportion to the contract, while the balance is held as 
a deferred charge against other contracts. This applies to all 
tools which have been charged, either in full to a government 
contract, or in full to the overhead in which the government 
contract would participate. 

A classification of tools is here appended without any 
reference to the life of a particular tool. This list was com- 
piled at a conference held with the leading tool manufacturers 
of the country for the purpose of determining from the name 
and nature of a tool as to whether or not it should be classed 
as an asset or a perishable article. While it is not intended 
to present this as a complete list, practically all tools may be 
classified in this way. 

Asset Tools 

Back rests for swing tools Splining 

Benches Stamping 

Bench centers Tapping 

Calipers Floating holders 

Chucks Forming tool holders 

Chucks for screw machines Gages 

Chucks for special machines Gear cutting attachments 

Countershafts Gear teeth 

Cutting attachments Hangers 

Depth gages Index centers 

Die holders Indicators 

Drilling attachments Knurl holders 

Feed attachments Micrometers 

Fixtures'. ' Milling attachments 

Breaching Plain pulleys 

Edging Plain vises 

Handmilling Planer and shaper gages 

Milling Plates 

Rolling Plugs 



;ro 



COST-PLUS CONTRACTS 



Asset Tools — Continued 



Plungers 
Pointing tools 
Pointing tool holders 
Profiles 
Prongs 



Pulleys 
Saw frames 
Slotting attachments 
Special tools and holders 
Snaps 



Perishable Tools 



Arbors 

Box tools for screw machines 

Broaches — for key way 

Bushing 

Cutting and special holes — sim 

ilar to splitting 
Chisels 

Circular cut-off tools 
Circular form tools 
Circular thread tools 
Collet blanks 
Counter bores 
Countersinks 
Cutters 

Dies — threading — all sizes 
Die holders 
Drill tips 
Drill shanks 
Drills — all sizes 
Edging cutters 
End mills 

Files — all kinds and sizes 
Forming tools 
Grinding wheels — all kinds and 

sizes 
Handmilling cutters — numerous 
Inscription rolls 
Jigs 



Milling cutters — numerous shapes, 
sizes, and cutting edges 

Mallets 

Mandrels — sometimes called arbors 
•Paper gages 

Punches and dies 

Polishing holders 

Reamers — hand and machine 

Reamer shanks 

Roughing tools 

Slot cutters 

Screw drivers 

Slotting saws — hackley, circular 

Splitting tools — similar to broaches 

Stamps 

Stamps — marking 

Steel sockets 

Taps 

Threading dies 

Thread gages 

Turning tools — numerous shapes 
and cutting edges 

Tweezers 

Twist drills 

Wire gages 

Wrenches — all kinds, shapes, and 
sizes 



Handling and Storing of Tools 

All tools of whatever nature, whether manufactured or 
bought, should go into a storeroom where a proper record is 
kept of their receipt. None should be charged to any con- 
tract until requisitioned from the storeroom, and no tool 
should be issued to replace another until its scrap value has 



MATERIAL, LABOR, AND EQUIPMENT 



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512 COST-PLUS CONTRACTS 

been accounted for. When tools are chargeable to a particular 
contract a distinguishing mark should be stamped on them be- 
fore they are taken into stores. 

Accounting for Tools 

A method of recording the number of tools received, 
issued, in use, and scrapped is shown in Form 102. On this 
single form all the details are given as to the number of a cer- 
tain kind of tool chargeable to a particular contract. 

Asset Tools Charged at Cost 

All tools manufactured or bought by the contractor which 
are to be used exclusively on cost-plus contracts and are to be 
owned by the buyer should be treated as a cost against such 
contract. 

Perishable Tools 

In some plants it is the custom to add an arbitrary per- 
centage on labor to cover the overhead on tools — which per- 
centage in many cases is much higher than the overhead rate 
finally determined. The difference is often adjusted by cred- 
iting General Factory Overhead account, which automatically 
reduces the amount for distribution. This method is unsound 
in principle and should not be allowed. 

All consumable tools used on cost-plus contract work are 
chargeable as indirect material. This includes jigs, dies, 
gages, and special tools needed for a particular job. 

When perishable tools are charged to cost-plus work, full 
credit for any residual or scrap value should be given. 

Old Tools Remade or Salvaged 

It frequently happens that special tools made for one con- 
tract may be salvaged and used on another. For example, 
some tools may only need to be sharpened or cut down to 



MATERIAL, LABOR AND EQUIPMENT 513 

become practicall}^ as good as new. In calculating their cost 
25% should be added to the material cost or the market value 
of the raw material from which the tool is made, to cover 
the scrap produced when originally manufactured. To this 
should be added the labor already expended, from which 
should be deducted the new labor cost required to salvage the 
tool. The overhead added should be based on the labor actu- 
ally employed in the changing of the tool. 

This method is a tentative one and may be used if the 
actual cost of the tools cannot be ascertained. Whatever 
method is used, the cost should not exceed the price of a new 
tool. 

Repairs or Replacement of Tools 

Wherever a cost-plus contract provides for increased fa- 
cilities of the plant, all tools, including jigs, fixtures, and small 
tools required to operate a single machine or a series of ma- 
chines, are to be considered as increased facilities. Any neces- 
sary repairs or replacements of the original equipment should 
be regarded as indirect expense and charged to normal cost, 
like all other classes of indirect material. 

Identification of Tools Used 

Standard tools made or purchased for special work may 
be used on various contracts, in which case it is a difficult 
matter to check up their use and see that the cost-plus con- 
tracts receive adequate scrap value. Any special or salvaged 
tools to be charged to specific cost-plus work should be stamped 
for identification. It is further recommended that all salvaged 
tools before going into the machine tool department to be re- 
worked on, should pass through the tool room and a record 
be made of the same to prevent them from being recharged at 
tool cost. 



5M 



COST-PLUS CONTRACTS 



Treatment When Basis of Contract is Changed 

In some cases a contract may be changed from a straight- 
price to a cost-plus base, in which case any unconsumed tools 
and material belong to the contractor and could be used on 
the new cost-plus work. So far as the material is concerned 
the change presents no difficulty. Any perishable tools on 
hand, however, may have been partly used, in which case they 
should be charged to the cost-plus contract at their cost value 
less depreciation for use, w^hich might run from 5% to 95%. 
From the author's experience it would seem that unless it is 
practicable to appraise each tool separately, a depreciation of 
50% should be taken off their total cost before charging them 
to a cost-plus contract. 

Overtime and Idle Time 
Overtime 

All productive overtime should be treated as direct labor 
and should not form a part of the overhead expense. 

Idle Time on Operation 

Time is frequently lost by productive workmen when the 
machinery needs to be adjusted or the operating departments 
are not properly balanced. That is to say, one department 
may not be able to supply the next department in that line of 
work with sufficient semi-finished material to keep it fully em- 
ployed. Where idle time is due to these causes and the work- 
men involved cannot be used on other jobs, the cost should be 
charged to the particular contract on which the men are en- 
gaged, but no overhead should be added to the lost time. Of 
course, idle time which is charged in full to a particular con- 
tract should be confined to workmen who are engaged almost 
continuously thereon. The idle time of men who are only 
temporarily employed on the job should not be charged as a 
direct cost but as overhead. 



MATERIAL, LABOR AND EQUIPMENT 515 

Where the exact contract charge for the idle time which 
is allowable as cost cannot be determined definitely, it should 
be treated as regular overhead to be distributed over all con- 
tracts. The idle time of indirect workers or foremen em- 
ployed wholly on cost-plus work would only be chargeable as 
a direct cost if such employees were compelled to be laid off 
while work on the contract was temporarily suspended, due to 
the fault of the buyer or to unavoidable working conditions. 

Waiting Time as a Deferred Charge 

Attention is here directed to the treatment of time lost 
while the men are waiting for the contract work to begin. In 
this case the charge should not constitute a direct cost to any 
contract, but should be deferred to be spread over all contracts 
at the proper time. Furthermore, no overhead should be 
added to this idle time, as ordinary shop overhead expense is 
not incurred unless the men are working. The hiring of men 
preparatory to beginning work on a contract is purely an or- 
ganization expense, and as such constitutes a deferred charge 
to the contracts when work is actually in process — which 
amount may be spread over several months. 

The hiring of men wdio are paid to hold themselves ready 
to undertake contract work promptly and expeditiously, re- 
sults in a quicker turnover of capital than if, when work is 
waiting for them, production is delayed until they can be found. 
Hence, profits are increased by this precaution. For instance, 
when the hiring of men is a preparatory precaution for the 
purpose of pushing the production of munitions or other im- 
portant governmental work, the forethought of the manufac- 
turer naturally results in larger profits to him. Therefore, in 
such a case waiting time should be treated as a deferred charge 
to be distributed over the cost-plus and other contracts, and 
would only be entirely chargeable to cost-plus work when the 
expenditure was authorized by the buyer, 



CHAPTER XXXII 

COST-PLUS CONTRACTS— EXPENSE AND 
OVERHEAD ITEMS 

Distribution of Overhead 

Direct and Indirect Distribution 

Wherever the distribution of overhead is based on the 
direct labor hour, a clear distinction should be made between 
the labor hours chargeable to an operation and those charge- 
able directly to a contract which may not necessarily l>e direct 
labor. In other words, direct labor should always be defined 
as productive labor in the sense that it is directly applied to 
some operation. If only one contract is being worked on in 
a particular department, the common practice is to charge it 
with 1 00% of the departmental labor including the indirect 
labor. But where overhead has to be distributed according 
to the productive labor method, indirect labor should never be 
used as a factor in the distribution, even though such labor 
may be chargeable in full to a single contract. 

Distribution Over Periods of Less Than a Month 

If the work on a cost-plus contract starts on the fifteenth 
day of the month, the direct labor is chargeable for only one- 
half of the month while the overhead expenses would cover 
the complete month. Under these circumstances it would be 
equitable to base the distribution and charges to the cost-plus 
contract on only one-half of overhead and one-half of the pro- 
ductive labor on other contracts. Other broken periods 
should, of course, be charged proportionately to the time spent 
upon the work. 

.S16 



EXPENSE AND OVERHEAD ITEMS 517 

Overhead on Bulk Products 

The best method of distributing expenses over a prod- 
uct manufactured in bulk is on the basis of the number of 
pounds, tons, gallons, or other units of production delivered 
during the month on cost-plus and other contracts. 

Deferred Overhead Charges 

Preliminary Expenses 

On many contracts considerable preliminary work often 
has to be done. For instance, the job may require that ex- 
periments be made, drafting work prepared, and special tools 
be manufactured. If expenditures for work of this character 
were charged to overhead at the time they were incurred, the 
contracts would bear a much larger proportion of the overhead 
than would rightfully belong to them, especially as part of 
these preliminary expenses would be chargeable to subsequent 
periods. Therefore it would seem best to defer the distribu- 
tion of such expenses until a later period, especially if over- 
head is distributed on the productive labor plan, as labor on 
the contract during the first period may be inconsiderable. 

Deferred Expenditures 

Any general expenditures — such as would be incurred by 
moving benches or a row of lights — which are not chargeable 
to current repairs and cannot be considered as an asset increase, 
and which in consequence neither enter into production nor 
increase the salable value of the plant, would not be acceptable 
if charged in full to cost-plus contracts. Such expenditures 
are chargeable to deferred overhead and not to capital account 
under ordinary commercial conditions. Therefore, if they are 
incurred on cost-plus work, but are advantageous to the con- 
tractor before or after its completion, they should be treated 
as deferred overhead expenses and spread over several months. 



5i8 COST-PLUS CONTRACTS 

Administrative Expenses 
Method of Treatment 

Under ordinary manufacturing conditions, administrative 
expenses are prorated over the cost of production and are not 
applied to the selling end of the business. Under cost-plus 
contracts this method would not be equitable, in view of the 
fact that administrative or any general management expense 
would apply equally as well to the purchasing and sales depart- 
ments as to the manufacturing departments, and on govern- 
ment cost-plus contracts selling expenses are not allowed as a 
cost. Therefore, a fair proportion of the administrative ex- 
pense should first be prorated over the manufacturing, selling, 
and purchasing departments. That portion charged to manu- 
facturing and purchasing would be prorated over the cost of 
production, but the portion charged to selling would be in- 
cluded in selling expense, which is not charged to cost-plus 
work. 

That part of the administrative expenses which applies to 
production may be equitably distributed over all contracts on 
the basis of prime cost, or on total cost. This last method is 
usually to be preferred when the distribution is first made be- 
tween different plants owned by the contractor. 

Where a concern owns dwelling houses and investments 
of a like character, which entail a certain amount of super- 
vision, a portion of the administration expenses should be 
chargeable to the carrying on of such investments. These 
charges have no bearing whatever on the cost of production. 

Excessive Salaries 

In the distribution of administrative expenses, the ques- 
tion as to whether certain salaries are excessive or not often 
arises. While it may be impossible to state what salaries 
should be allowed, the matter should receive careful attention 
by the officials of a company in the conduct of their business 



EXPENSE AND OVERHEAD ITEMS 



519 



wherever a large advance appears in the salaries paid during 
one year over those of another, especially when cost-plus con- 
tracts are being worked on. The suggestion is here offered 
that the practice of increasing salaries to the point where they 
seriously encroach upon current profits as compared with those 
distributed in previous years, should be discouraged. It is 
reasonable to suppose that if an executive is receiving a salary 
of $25,000 a year and the profits earned by the business amount 
to 12% on the capital invested, he would not be entitled to 
double this amount if tlie effect of the increase of $25,000 were 
to reduce the per cent of earnings on the capital. 

Salaries Paid After Termination of Employment 

While salaries paid after termination of employment are 
sanctioned by business custom, they should not be regarded as 
a cost for distribution over current contracts on which the 
past services of employees have obviously no bearing. Pay- 
ments for full time to officers or employees who are on weekly 
or monthly salaries, and who leave in the middle of the week 
or month, would be allowed as cost where it is impracticable to 
retain their services for the full period. Salary on a weekly 
or monthly basis, if by contract, must legally be paid if the 
employee is discharged or leaves in the intervening period. 

Where the resignation of an officer or an employee who is 
working on a weekly or monthly salary is demanded, his full 
time should not be charged as cost on current contracts unless 
it can be shown that it was in the interest of these contracts 
to discontinue such services. 

Bonus and Pension Payments 

Bonus Payments 

Any bonus which is based on profits payable to either 
workmen, or officers and clerks, should not be regarded as a 
regular item of cost 



520 COST-PLUS CONTRACTS 

Bonuses paid at the end of the year are seldom regarded 
as a salary addition but more as a reward or gift for the faith- 
ful performance of duty. They depend upon the amount of 
profits made by the business and contributed thereto by its em- 
ployees. The practice of some firms is to set up a reserve for 
salaries, charging off each month a specific sum to overhead. 
In such a case, if the bonus is properly authorized by the firm 
and is an actual liability, it may be treated as a cost item when 
paid, but where it is contingent in any way either on profits or 
length of service, it should not be so treated. All bonuses of 
this character should be charged to profits, and only those ac- 
tually paid for current work should be treated as a regular 
cost item. 

A bonus calculated as a percentage on weekly wages is 
sometimes offered to those employees who hold their jobs con- 
tinuously for six months or longer. If such a bonus is paid 
for cost-plus contracts, it should be reimbursed without profit. 
An item of this character is contingent on continuous service 
and in the opinion of the author should be classed as a special 
organization expense on which, however, the contractor should 
not receive any profit. Even if the reserve is made each week 
and charged to wages with an offsetting credit to a reserve 
account, a contract should not be charged with this item either 
directly or indirectly until the money has actually been paid. 
If the bonus is added to direct labor it becomes a direct charge; 
if added to indirect labor it becomes part of the overhead. 
Needless to say, on commercial contracts any extra percentages 
paid to w'orkmen should be charged to those contracts. 

Pension or Compensation Indemnities 

Pensions are only chargeable in whole or in part to cost- 
plus w'ork when a reserve is set up for this expense, based on 
the number of men working in the plant, all or part of whom 
are engaged on the contracts. 



EXPENSE AND OVERHEAD ITEMS 521 

Pensions that are being paid to workmen, or their heirs, 
for services rendered prior to the commencement of cost-plus 
contracts should not be charged thereto. Usually pensions 
are based on the number of years of service — in most instances 
twenty years. When the pension commences, in the majority 
of cases, the employee ceases to work and is retired. It would, 
for obvious reasons, be unfair to charge any part of such ex- 
penditures to cost-plus contracts, their proper disposition be- 
ing to Surplus account. 

Of course, where reserves are set up, the payments of the 
pensions are charged thereto and do not affect the overhead ex- 
penses. When they are charged to overhead as a reserve, 
they form part of the general administrative expenses and are 
so distributed. 

Insurance and Taxes 

Fire Insurance 

The United States Government does not' usually require 
its own property to be insured, such property including raw 
material bought on the government's account, finished parts 
or articles owned, or any asset of the government. Therefore, 
when possible, fire insurance policies should not cover govern- 
ment-owned property and the government should not partici- 
pate in the insurance premium charge on any cost-plus work. 
However, blanket policies may at times be taken out to 
cover the plant as a whole, in which case it might be difficult 
to apply the premium to any particular class of work passing 
through the plant. In such cases the insurance would be 
allowable as an overhead item. Should there be a fire loss 
under such a policy, the compensation received from the in- 
surance companies should be prorated to the credit of cost- 
plus contracts, depending upon the nature of the loss. Where 
the premiums are charged to overhead, they should be pro- 
rated on the basis of the proportion of work in process and 



522 COST-PLUS CONTRACTS 

Stock or stores on hand. The contractor should be reimbursed 
for the premiums paid with profit, and the proportion of the 
cost chargeable to cost-plus work should be charged as normal 
cost. 

Insurance Other Than Fire 

There are many different classes of insurance, the pre- 
miums of which should be regarded as cost items — for instance, 
insurance covering tornados, losses due to explosions, losses on 
buildings and contracts, insurance covering use and occupancy, 
boilers, robbery, elevators, and so on. As the premiums are 
paid for the protection not only of capital but of production, 
they should be treated as part of the cost and distributed over 
all contracts. 

Liability Insurance 

Where a liability insurance company assumes all the risk, 
insurance premiums may be charged as cost items and the 
contractee or buyer should bear his proper proportion thereof. 
Where the contractor assumes the liability in case of an acci- 
dent, the losses may be treated in various ways. The com- 
missioners in some states fix the liability and direct in what 
manner the indemnity f.hall be paid to the employee who has 
met with an accident. 

Payment may be made in one of two ways necessitating 
different methods of treatment. If, for example, the indem- 
nity is paid in one sum it is either chargeable to the overhead 
expense of the plant, provided the accident happened when 
cost-plus work was being performed, or it may be charged 
directly to a specific contract, provided the injured workman 
was specifically engaged on that contract and not on others. 
In the case of indirect, or non-productive workers, the loss 
should be charged to overhead. 

On the other hand, the indemnity may not be paid in one 



EXPENSE AND OVERHEAD ITEMS 523 

sum, but may be spread over a long period — from twelve to 
thirty-six months — in the form of monthly payments. In 
cases where such current items are being paid to indemnify 
accidents which happened prior to work beginning on cost- 
plus contracts, such contracts could not be equitably charged 
with any part of these prior indemnities. However, in the 
majority of cases it may be more practical to allow all liability 
premiums to be charged as overhead expense disregarding 
when the accident in question happened. Any liability pay- 
ments made after the completion of the cost-plus contracts 
would, of course, be borne entirely by the other contracts, as- 
suming that the cost-plus contracts had participated in pay- 
ments for accidents which happened before the work was 
started. 

In some government contracts, a clause is introduced re- 
imbursing the contractor in the performance of the contract 
for "a proper proportion of physical losses actually sustained 
in connection with the business, including losses by flood, 
storm, vandalism, theft, any acts of God, acts of war, or other 
casualties not compensated for by insurance or otherwise." 
Naturally, any loss of an exceptional character in connection 
with government contracts, would have to be specially treated. 
Ordinary losses which are of common occurrence in manufac- 
turing plants are to be treated as previously described. 

Premiums for Life Insurance 

Life insurance premiums are sometimes paid as a pro- 
tection for capital investment and to reimburse the firm or 
company for the loss of the services of some individual. Upon 
the death of the assured the insurance is, of course, paid to the 
company and not to the heirs of the assured. Such premiums 
can in no sense be regarded as a charge against any contract. 
The amount recovered from the insurance company could not 
be credited to contracts, many of which would have been com- 



524 COST-PLUS CONTRACTS 

plcted long before the insurance was paid Such insurance 
premiums are clearly a charge to profit and loss or surplus. 

Income and War Excess Profits Taxes 

All income taxes and war excess profits taxes are charge- 
able against surplus and should not be treated as a cost. 

Government Taxes on Freight 

Taxes which apply to freight on material and supplies 
ordered for a cost-plus government contract should not be 
charged as a cost. An account should be set up on the books 
and charged with all items of this character. At the end of 
each month a voucher should be prepared and when approved 
by the government accountant in charge, should be sent to 
the Internal Revenue Department in Washington in order to 
have the amount refunded. 

Taxes on freight, supplies, and other indirect materials 
which do not definitely apply to any particular contract when 
purchased should be charged as overhead. Any portion there- 
of chargeable to the government in connection with cost-plus 
contracts should be charged in the same proportion as the over- 
head charges are distributed. The balance of the account, 
after setting up the charge to the government, is a direct 
charge to the contractor. 

Interest, Depreciation, and Depletion 

Interest as a Cost 

While interest is not generally recognized as a standard 
item of cost because of the great difference of opinion among 
accountants as to the correctness of its inclusion, yet on some 
cost-plus contracts interest is allowed. The matter should, in 
all cases, be treated according to either the terms of the con- 
tract or any other specific agreement between the buyer and 
seller. 



EXPENSE AND OVERHEAD ITEMS 525 

Interest charges may be divided into the three following 
divisions : 

1. Interest on borrowed money actually paid. 

2. Interest on plant, machinery, and equipment. 

3. Interest on working capital. 

Interest on Borrowed Money 

Any interest paid by the contractor on borrowed money 
used as working capital may be treated as a part of the regular 
overhead expense only when the actual amount of capital bor- 
rowed and used in connection with a definite contract can be 
determined. Ordinarily, however, it would be difficult to 
allocate the exact capital required to finance any particular 
contract. Therefore, the charging of the whole amount to 
overhead to be prorated over all contracts is advocated, ex- 
cepting where the interest is allowable only on the material 
used on cost-plus work, such as in some government contracts 
which include the ''Definition of Costs" (see page 496) as a 
part of the contract. 

The following quotation is taken from the pamphlet 
"Definition of Costs :" "Interest on investment or on bonded 
debt shall not be considered as an expense entering into the 
cost of contracts for the United States, but the contracting 
officer will reimburse the contractor for interest paid on money 
borrowed to finance the purchase of materials necessary to 
complete contracts for the United States. Interest cost will 
not be considered as a cost to the contractor upon which profit 
is to be calculated." 

In the pamphlet already referred to, the following method 
is suggested for ascertaining the interest charge on money 
borrowed to finance purchases of material : 

"i. Ascertain the amount of the loan upon which interest 
is actually being paid. This loan should have been negotiated 
at or after the date of the government contract. When the 



526 COST-PLUS CONTRACTS 

amount of the loan is ascertained, the amount of interest pay- 
able on such loan each month should also be ascertained. 

"2. Take the total amount of charges each month against 
all contracts, including material, labor, and overhead, and 
divide the amount of material charged during the current 
month to the government contracts by this amount, thereby 
ascertaining the percentage to use in connection with charging 
the cost-plus contracts with interest. For example, if the 
amount of the loan is $100,000 at 6%, the monthly charge for 
interest would be $500; and if the total charges against all 
contracts for the month amounted to $400,000, and the amount 
charged against the government contract for material 
amounted to $150,000, the material charge would therefore be 
37.5% of the total charges, and the amount of interest, there- 
fore, which would be chargeable against the cost-plus contract 
would be 37.5% of $500." 

The word "material" here may be construed as direct or 
indirect material. 

Interest on Working Capital 

The following method is suggested for ascertaining inter- 
est on the working capital. 

"The total charges for the month against cost-plus con- 
tracts are to be ascertained and 6% of this amount is to be 
charged as interest to the cost-plus contracts from the fifteenth 
day of each month — this being considered as an average for 
the month. Such interest is to run until the charges in ques- 
tion have been paid. 

Inventories 

"Interest on the inventories of raw material and supplies 
on hand is to be found as follows : "The total charges against 
all contracts are to be ascertained, and the percentage of the 
charges against cost-plus contracts to the total of all charges 



EXPENSE AND OVERHEAD ITEMS 527 

is to be used as percentage to apply to the inventories as re- 
ferred to, and interest at 6% on said amount is to be allowed 
the contractor each month. The inventories in question are 
to be taken at a figure which would be the average inventories 
arrived at by taking the beginning inventories and the ending 
inventories each month and dividing the same by two. The 
interest on the inventories is to date from the first day of each 
month. 

"The buyer is to be allowed interest on all payments made 
to the contractor. 

"All interest, as referred to above, should be carried in 
the same manner as regular interest account of an account 
current. In other words, this interest account at the end of 
each month will show the amount to be paid to the contrac- 
tor by the buyer. 

"It is understood that if the buyer makes the contractor 
any loans, interest on such loans or any interest that the con- 
tractor pays to banks or other parties is not to be charged as 
cost on cost-plus contracts. Interest on working capital, as 
outlined above, is intended to cover these or other items of in- 
terest." 

Interest on Plant, Machinery, and Equipment 

When the product passes through practically all depart- 
ments of the plant and also in cases where interest on the capi- 
tal invested in buildings, machinery, and equipment cannot be 
charged directly to specific contracts, it should be treated as 
part of the general overhead expense to be distributed over all 
contracts. Neither interest nor depreciation on any building, 
machinery, or equipment not used in connection with cost-plus 
work should be charged against a cost-plus contract. 

As the interest charge is based, on the amount of capital 
invested, only the depreciated values of the plant assets should 
be considered. In other words, if the original cost of the 



328 COST-PLUS CONTRACTS 

building waS $100,000 and its value has depreciated $10,000, 
either by writing off or providing a reserve, the net capital 
invested in that building would be $90,000 and interest should 
be calculated on this amount only. 

Profit on interest chargeable on a plant investment which 
is owned by the contractor should never be allowed. The in- 
terest in such a case does not represent either a payment or an 
expenditure in connection with a particular contract. In other 
words, any interest allowed on plant assets should be a reim- 
bursement only, without the addition of any profit such as 
would be added, for instance, to depreciation which is referred 
to below. 

Depreciation and Interest on Plant Assets 

On cost-plus work it sometimes happens that part of the 
equipment is owned by the contractor and part by the buyer. 
In such a case the same rates of depreciation should be calcu- 
lated on the cost of both the contractor's and the buyer's equip- 
ment, and in the case of interest the calculations should be 
made on the depreciated value in both cases. In other words, 
the buyer should be credited with both depreciation and inter- 
est on the same terms or in the same manner that he is charged 
with these items by the contractor for the use of the latter's 
equipment. 

An interesting method of adjusting this matter, usually 
to the satisfaction of all concerned, is as follows : The total 
valuation of the buyer's and the contractor's plant assets and 
the percentage of one to the other is ascertained and used as 
the basis for the distribution of depreciation and interest. To 
illustrate, if the total valuation of the plant assets in a given 
shop amounts to $100,000 and 40% belongs to the buyer and 
60% to the contractor, these percentages would be used in 
connection with the percentage of direct labor employed, for 
determining the distribution of depreciation. No depreciation 



EXPENSE AND OVERHEAD ITEMS 



529 



and interest would be chargeable against the buyer until his 
percentage of direct labor exceeded 40%. If for instance the 
buyer's percentage for direct labor was 50%, then he would 
bear ten-sixtieths of the amount charged as depreciation on 
machinery and interest on plant. 

\MiiIe the policy of having the valuation of a plant made 
by an appraisal company meets with the hearty indorsement 
of the author, often from a cost standpoint appraisal figures 
may be misused if values other than cost are set up on the 
books. Some appraisals show the market or reproductive 
value in addition to the cost value less the proper rate for 
depreciation. To set up either a reproductive or depreciated 
value in the accounts is to place figures on the books which 
are useless in calculating depreciation and interest. While 
the market value of the plant is useful information if a sale is 
being considered, and the reproductive value is equally neces- 
sary in case of fire loss, neither of these values has any 
bearing on depreciation value. On the other hand, the setting 
up of the depreciated value on the books eliminates the cost 
value of the property upon which depreciation should be based. 
Therefore, only the cost value of an asset should be entered on 
the books wherever the appraisal report is used. 

Depletion 

In checking up costs on cost-plus contracts, consideration 
should be given to the factor of depletion. As already stated, 
the contract itself specifies that material and other items are 
chargeable at their cost to the contractor. Raw materials, 
however, such as lumber, iron ore, or coal may be extracted 
from land owned by the contractor and used on his contract 
work. Under ordinary conditions this kind of material would 
be charged at the cost of mining or lumbering plus a percent- 
age of the cost of the land itself — computed so as to extinguish 
the purchase price when the material in or on the land was 



530 



COST-PLUS CONTRACTS 



removed. So long as the property remains in the possession 
of the contractor, his cost only must be considered. 

The argument has been raised that, if the market price 
of the material contained in or on the land advances consider- 
ably, this naturally raises the value of the land to a much 
higher figure than was originally paid for it. Therefore the 
contractor should recalculate his costs of material over and 
above the actual amount paid for mining or lumbering, and 
base them on the appraised market value of the land. While 
this theory would be sound for the purpose of sale, it would 
not apply to cost-plus work. As stated before, the terms 
of a cost-plus contract always presuppose that the contractor 
is to charge all elements of cost at their actual cost plus a fair 
percentage of profit. 

Method of Figuring Depreciation 

The figuring of depreciation is a simple matter when the 
rates have once been decided upon, after which the distribu- 
tion of the charges may be based on the productive labor 
method or any other suitable plan of overhead distribution. 
Of course, the most accurate results are obtained by making 
depreciation charges departmentally as the contract work 
passes through departments. 

As depreciation can only represent a loss in actual capital 
investment, the charge in all cases must be calculated on the 
cost value of the assets. The contention has been raised that 
the market value of plant assets should be set up on the books 
and depreciation calculated thereon. This theory is entirely 
wrong. If the plant assets at cost as carried on the books are 
above the market value and the contractor wishes to reduce 
them to this value, he can do so only by writing off depreciation 
from the cost thereof. On the other hand, if the market value 
is in excess of cost and the plant assets are written up to agree 
with such market value, this would entail crediting profit and 



EXPENSE AND OVERHEAD ITEMS 



531 



loss or surplus with a fictitious profit and then writing off 
this fictitious profit at future dates in the form of depreciation. 
This procedure would be entirely unsound. It is well to em- 
phasize again that depreciation can only apply to the amounts 
actually invested in plant assets and has nothing to do with 
their market value. If the contractor desires to sell his plant 
he may increase its valuation to the market value if such value 
is higher than cost, but this has nothing whatever to do with 
the question of depreciation. 

Profit may be added to the depreciation charge for work 
on cost-plus contracts on the theory that as depreciation repre- 
sents a loss in the value of the equipment used, it is as much a 
part of the cost as perishable tools which are entirely used up, 
or the depreciation on asset tools. 

Guarding of Property 

Police Protection 

There are three kinds of police protection, namely, protec- 
tion by military forces, by armed guards employed for the 
purpose, and by detectives. It is good business policy for 
armed guards to be employed for the prevention of damage 
to the plant whether or not governmental work is being done. 

Where cost-plus work is handled, the contracts would 
naturally bear their proper proportion of this expense which 
should be charged to overhead. But where special guards are 
employed to guard government property, the expense would 
be chargeable in full to the government and should form part 
of the normal cost. If the contractor, when undertaking 
government work, increases the number of guards, the govern- 
ment should not bear all the cost, inasmuch as both property 
and profits of the contractor are thereby protected. Such pro- 
tection is analogous to insuring the occupancy of business 
premises which naturally insures the capacity to make profits. 



-y COST-PLUS CONTRACTS 

Where the plant is considered by the contractor to be 
sufficiently protected, prior to government work, and where 
the contractor is instructed to employ extra guards, all extra 
expense in connection therewith should be chargeable against 
the contracts provided that the cost-plus contracts are the only 
contracts being worked on. In other words, the excess cost 
which a contractor is obliged to incur on account of these 
contracts should be charged in full against such contract. In 
cases where the adequate protection of the contractor's prop- 
erty as a business proposition prior to government work has 
been neglected or not provided for, the contractor should bear 
a portion of this cost, 

Guard House 

Guard houses are small buildings erected for the use of 
the men who guard the plant — whether special police or watch- 
men. In the majority of cases these guard houses would be 
treated as a betterment or an asset addition to the plant, the 
whole expense of which would be borne by the contractor on 
the theory that he should properly safeguard his plant from 
theft, the loitering of undesirable persons, or malicious de- 
struction. But where the protection is adequate for normal 
conditions and the contractor is requested to provide additional 
safeguards, such additional expense may be treated either as 
1 00% overhead to the cost-plus contracts or as overhead for 
distribution. It would seem more equitable, however, to treat 
the whole expense as overhead, inasmuch as the plant is there- 
by receiving the benefit of extra security while engaged on 
profitable contracts, 

Guards' Uniforms, Badges, and Other Equipment 

The cost of the equipment of police guards who may be 
hired for the protection of special contracts should be limited 
to the amortization of any guard houses, the cost of wages, 



EXPENSE AND OVERHEAD ITEMS 



533 



and the cost of serviceable uniforms and badges which may 
answer the purpose intended. Overcoats, shoes, or puttees 
should not form a part of this cost, nor should the badges 
be expensive. The cost of all identification cards of em- 
ployees should be charged to overhead expense inasmuch as 
the contractor participates equally with the buyer in such 
benefit. 

Distribution of Protection Charges 

Where the cost of police protection cannot be distributed 
by means of any of the standard methods, it may be allocated 
to the various contracts on the basis of the number of pro- 
ductive employees engaged on each. 

Miscellaneous Expense Items 

Blue-Prints 

Blue-prints supplied by the contractor may be subject to 
costs and profit. If supplied by the buyer, no profit should be 
added thereto. All blue-prints charged to the cost-plus work 
should be accounted for at the end of the contract, as these 
documents may be of value to the buyer on other contracts. 

Cash Discount 

Any discount obtained by the contractor on direct mate- 
rial bought for and chargeable to cost-plus contracts, should 
be deducted from the purchase price. Indirect material and 
supplies are usually carried in stock, and information as to the 
amount used on cost-plus contracts may not be obtained until 
the end of the cost period. The following plan is suggested 
to take care of cash discount : Add the totals of indirect ma- 
terial and supplies which are chargeable to both cost-plus and 
other contracts; ascertain the percentages they bear to each 
other; use these percentages for the distribution of the cash 
discount in each case. 



534 COST-PLUS CONTRACTS 

Drafting Expenses 

Drafting expenses are ordinaril)' a direct charge against 
the job for which the drawings are made. In no case should 
a certain amount of this expense be charged to a cost-plus 
contract and the balance to overhead in which the contract 
also participates. Another method of handling the item as a 
direct charge is to treat it in the same manner as stated under 
the heading "Rebuilding, etc.," page 499. 

Defective Work 

Spoiled and defective work, if not more than the average 
amount under normal conditions, is allowed as an element of 
cost chargeable to cost-plus contracts; but if such work is the 
result of carelessness which could have been avoided by the 
exercise of reasonable diligence on the part of the contractor 
or his supervising agents, it is not allowed as an element 
either of direct or overhead cost. 

Experimental Expense 

When expense incurred on experimental work has a direct 
bearing on cost-plus contracts, it may be charged in full; and 
the same rule would, of course, apply to any contract. Work 
of this character is sometimes steadily maintained as a part of 
the fixed manufacturing policy, in which case, if it is of value 
to the cost-plus work, it may bear its proper share of the over- 
head chargeable thereto. 

Employment Department 

The maintenance of an employment department should be 
treated as an overhead expense and in no case as a direct 
charge against cost-plus contracts. The theory may be ad- 
vanced that the contractor is compelled to open such a depart- 
ment if he is to secure good workmen and exclude undesirable 
employees. Nevertheless, as such a department obviously 



EXPENSE AND OVERHEAD ITEMS 535 

tends to increase the efficiency of the whole plant, and the more 
efficient the plant the greater the earnings, all contracts should 
participate in the expense of maintaining the department. 

Intercompany Expenses 

A subsidiary company is sometimes charged with certain 
expenses incurred by the parent company. Any intercompany 
expenses should always receive particular attention to deter- 
mine whether or not they are equitable as applied to cost-plus 
work. Usually a subsidiary company has a complete organiza- 
tion of its own. Therefore any charge from the parent com- 
pany should consist only of a proper share of executives' sala- 
ries and any items of expenses expressly incurred on behalf of 
the subsidiary company. In other words, the subsidiary com- 
pany should not be charged with a share of the general and 
administrative expenses of the parent company as ^ whole. 

Patents and Royalty 

No expenditures on patents, unless explicitly authorized 
by the buyer, should be charged to cost-plus contracts, even if 
such items are carried on the books of the contractor. 

When royalty is paid currently on machinery or equip- 
ment in daily use, it may properly be distributed over all con- 
tracts, providing that the machinery upon which the royalty 
is paid is used in connection with all contracts, otherwise it is 
chargeable only to those which use that particular machinery. 
Where royalty is paid for a limited period of time at the ex- 
piration of which it ceases, it should be treated as a deferred 
charge applicable to future contracts, 

Rental — Specific Charge for Same 

If a contractor rents a storage building to be used exclu- 
sively in connection with cost-plus contracts, the rental would 
be chargeable in full. This does not, however, apply to space 



536 COST-PLUS CONTRACTS 

in the factory or plant. The contractor is reimbursed for the 
use of his plant by charging off depreciation, taxes, insurance, 
repairs, etc., and the cost-plus contract bears its proper propor- 
tion thereof. 

Scrap and Waste 

The salvage value of scrap, waste, or containers used on 
cost-plus contracts should be deducted from the material or 
overhead cost of the work. Care should be taken to credit all 
current contracts with the salvage or scrap applicable thereto. 

Selling Expense 

Selling and a part of the administrative expenses should 
not be charged to government contracts. (See "Administra- 
tive Expenses," pages 518, 519.) 

Testing Expense 

Testing expenses should in the majority of cases be a 
direct charge against current contracts and not against over- 
head. A good rule to apply in connection with items of this 
character is to set up two accounts, Testing Expense Direct and 
Testing Expense Overhead. To the first account would be 
debited all direct charges against contracts, and to the second, 
all testing expenses which could not possibly be allocated to a 
particular contract. 

Training Employees Expense 

When employees are trained for the benefit of the busi- 
ness as a whole, the expense may be regarded as a regular 
overhead, but where trained for specific contract work, the ex- 
pense should be charged to the contract in full. 

Welfare Work 

Expenditures on welfare work should be treated as a 
cost for distribution over all contracts and would include : 



J 



EXPENSE AND OVERHEAD ITEMS 



537 



1. Wages paid employees while absent on account of 

illness. 

2. Expenses of operation and maintenance of hospital; 

also medicine and first aid supplies to the injured. 

3. Subscriptions to hospitals or other organizations to 

cover definite benefits to employees. 

4. Net expense of operating restaurants. 

5. Vacation allowances to wage earners. 

6. Other expenses such as conducting club rooms, read- 

ing rooms, educational classes, etc. 

These expenditures are allowable as cost on the theory 
that they promote cordial relations between employer and em- 
ployee, and in that way tend to increase production without a 
corresponding increase in the cost. 

Errors and Losses Due to Changes 

Reclamation of Errors 

All claims for errors should be a direct charge against a 
particular contract unless it is difficult to apply them specifi- 
cally, in which case they may be classed as overhead and dis- 
tributed over all contracts. It should be borne in mind that 
there are three classes of overhead expenses; first, overhead 
expense which under certain conditions may be charged in full ; 
second, expenditures which must be divided between two or 
more contracts in specific amounts ; and third, overhead which 
must be distributed on the same percentage basis over all con- 
tracts. 

Changes in Specifications 

Any losses through changes in the specifications should 
not be charged to cost-plus contracts unless the buyer has 
issued an order requiring such change, in which case the loss 
should then be treated as a direct cost item. 



538 COST-PLUS CONTRACTS 

Items Not Chargeable Unless Strictly Applicable 

Attorney Fees 

No attorney fees for the collection of bad debts or any 
other element of expense which does not apply to cost-plus 
contracts should be chargeable thereto. Services rendered by 
attorneys in connection with purely organization matters, or 
charges of a general character when not excessive, may be 
treated as regular administrative expenses of which the cost- 
plus contracts would bear their proportionate share. 

Bad Debts 

Bad debts should not be regarded as cost under cost-plus 
contracts, unless such losses would apply to such contracts. 

Brokerage Expenses 

Brokerage incurred in connection with commercial paper 
should not be considered as a cost item, unless interest charges 
are allowed under the terms of the contract and brokerage is 
considered as a part of the cost of interest. 

Donations and Entertainment 

Donations to charity and gratuitous gifts should not be 
treated as cost items. They have no connection with the ex- 
pense of manufacturing and are chargeable against the profits 
of a business. 

Entertaining expenses, like donations and gifts, have 
nothing whatever to do with the manufacturing expenses of a 
business. The only theory upon which the expense of enter- 
tainment might be treated as cost would be when incurred for 
the benefit of the workmen. In such a case it would be allow- 
able to charge it to welfare expense, as any work which pro- 
motes efficiency may be considered a legitimate 2art of the 
overhead. 



EXPENSE AND OVERHEAD ITEMS 539 

Real Estate Investment, Expenditures, Etc. 

Expenditures in connection with investments outside of 
the regular manufacturing expense should not be charged 
against current contracts. A special account should be opened 
for income and expenditures on investments so as to keep 
these items separate. 

Reserves 

Among the very few reserves which might equitably be 
charged as cost to cost-plus work are those for depreciation 
and pensions, or items of a similar character. Reserves for 
extraordinary repairs, contingent expenses, and like items 
should not be allowed as cost. 

Engagement of Expert Services 

The author is of the opinion that professional services 
rendered to a contractor for the benefit of the business as a 
whole, should be chargeable to overhead and prorated over all 
contracts as part of the administrative expenses of the busi- 
ness. But if an accountant were engaged specifically to look 
after the contractor's interests in connection with cost-plus 
contracts, such expenses should be borne wholly by the con- 
tractor. 



CHAPTER XXXIII 
SUSPENSION OR CANCELLATION OF CONTRACTS 

General Considerations 

The cancellation or suspension of any contract, whether 
on a fixed price or a cost-plus basis, may cause a contractor 
some loss unless the settlement covers compensation for obli- 
gations he has entered into in connection with the contract 
work. The possibility of loss is recognized by the United 
States Government in its contracts for munitions and supplies. 
Therefore, in most cases a cancellation clause protects the con- 
tractor, while the government, in its endeavor to be perfectly 
fair and just, has been more than liberal in its provision for 
possible losses due to the suspension of contract work. 

Naturally, the precise terms of the cancellation differ in 
almost every case. In general, however, the clauses provide 
that the contractor shall be reimbursed for raw material, sup- 
plies, component parts, and work in process on hand at the 
termination of w-ork on the contract, and that he shall be pro- 
tected from loss on commitments or orders for material in 
transit or not yet shipped from the vendor. A provision is 
made, hov^ever, that the contractor shall not be reimbursed 
for a greater quantity of material than would have been re- 
quired to finish the contract. 

The general principle is also recognized of reimbursing 
the contractor for all obligations incurred solely for the per- 
formance of the contract, from which he cannot be released 
without suffering loss. It should be borne in mind, however, 
that no claims would necessarily be recognized unless they 
were covered by the provisions of the contract. 

Reimbursement may be made to contractors upon the can- 

540 



CANCELLATION OF CONTRACTS 541 

cellation of a fixed price contract, a fixed profit contract, and a 
cost-plus contract. A general outline of the claims that might 
arise in each case is herewith given, but their recognition 
would depend upon the terms of a particular contract and 
whether or not these terms cover or allow the interpretation 
applied to the claim in question. The various items which 
may possibly be claimed are discussed under the heading of 
each kind of contract. Some of them are more or less of an 
intangible nature and, as such, very difficult to set forth as a 
claim. Claims cannot be made for a contingent or a possible 
loss, but must be based on actual and proven loss. 

Cancellation of Fixed Price Contracts 
Valuation of Inventory 

At the termination of contract work, an inventory should 
be taken at cost of all items of raw material, component parts, 
goods in process, and supplies purchased or manufactured ex- 
pressly for the contract in question. On these items the con- 
tractor may be entitled to an allowance for profit in addition 
to reimbursement. The profit on goods in process and parts 
manufactured may be ascertained by estimating the contract 
profit on a completed article and using the percentage of profit 
to cost to ascertain the profit on the cost of work in process. 
The cancellation clause in some contracts allows a 10% profit 
on the value of goods in process, in which case no further cal- 
culation need be made. 

An itemized statement should be prepared of the com- 
mitments or unfilled orders which could not be canceled with- 
out loss and which could not be used for any other purpose 
than the contract in question. 

The negotiation or settlement will be based on the in- 
ventories and statements referred to. In the majority of 
cases, much, if not all, the material both on hand and repre- 
sented by unfilled orders could be used to good advantage, if 



542 



COST-PLUS CONTRACTS 



not by the contractor himself, then by some other concern in 
the same or another trade. It might be advisable in some 
cases for the contractor to dispose of the material to the best 
advantage and to be allowed a certain per cent to cover any 
possible losses in connection therewith. Each case would 
necessarily have to be judged separately. In the majority of 
instances there should not be much difficulty in disposing of 
raw material without loss, unless its market price has fallen. 
The raw material cost can be readily determined, but the 
costing of goods in process will be a much more difficult mat- 
ter if no cost system is in operation. Where cost data are not 
available, it would be well to use the estimating or engineering 
cost of an article as a basis for computing the material and 
direct labor costs, and then add an arbitrary percentage to 
cover the overhead. When this is done, the figures should be 
taken from the books in such a manner as to show that the 
cost represents a fair average. 

Settlement of Commitments 

The loss on commitments or unfilled orders may be in- 
curred by others besides the prime contractor, and in such cases 
time is required to make the final adjustments. 

As an illustration, assume that A, as a prime contractor, 
orders material or components from B, and B to fulfill his 
contract with A orders material from C, and C orders from 
another so that the commitments of A involve a score or more 
different concerns. In such a case the most practical solution 
to the tangle would seem to be the negotiation of a settlement 
with the prime contractor based upon a percentage of the un- 
filled orders, leaving to him the reimbursement of B and so on 
down the line. In other words, the contract could be termi- 
nated by a settlement with A to cover all claims, leaving to him 
and the other parties interested the settlement of their own 
trouble 



CANCELLATION OF CONTRACTS 543 

Amortization 

Practically two claims for amortization which may be 
allowed on fixed price contracts are : 

1. Machinery, buildings, and equipment purchased dur- 

ing the term of the contract when the market 
price is lower at the termination of the contract. 

2. Machinery, buildings, and equipment purchased dur- 

ing the contract and which should be amortized 
over the contract. 

In the first instance the contractor would be penalized un- 
less an allowance were made for the loss incurred. Thus if 
plant assets were bought for $100,000 during the term of the 
contract, and at its termination their market price had shrunk 
to $50,000, it would be necessary to charge off $50,000 in 
order to render a correct balance sheet. 

In the second instance the contractor would be penalized 
if any items of machinery, buildings, or equipment which were 
not written off during the contract period were of such a spe- 
cial nature or so much in excess of the ordinary needs of his 
business that they could not possibly be used by him after the 
termination of the contract. 

In the adjustment of either of these two claims on a 
straight price contract, the question of importance is whether 
or not the matters were covered in fixing the price. At the 
time that the price was negotiated, all known factors should 
have been considered and included in the cost upon which 
profit was figured. If this was the case, a claim under these 
circumstances would not be entertained. But if the purchase 
of the building or equipment in question was made after the 
date of the contract, and if the additions to the plant were 
not contemplated before the price was set and, furthermore, 
were necessary to the completion of the contract, then such a 
claim should be considered. 



244 COST-PLUS CONTRACTS 

Where the plant additions were acquired prior to the date 
of the contract, or were contemplated and added after the 
date and for that reason were supposedly included in the fixed 
price, the question would still remain as to what proportion of 
their cost, if any, would remain for amortization after cancel- 
lation of the contract. If the cost of the plant addition were 
to be spread over the period of the contract, and the amortiza- 
tion were to be borne wholly by the contractor, an allowance 
should be made to him for that part of the amortization which 
he would have written off to himself during the period esti- 
mated as required for the completion of the contract. 

Plant Rearrangement 

While it is to be presumed that the plant of a contractor 
is equipped with all necessary facilities or that these will be 
provided for the carrying out of straight price contract work, 
nevertheless it is impossible to foresee all possible requirements 
which may arise. After work on the contract begins it may be 
advisable to rearrange the plant, if by so doing production can 
be speeded up. Under a fixed price contract, expenditures of 
this character would be treated as a deferred expense and pro- 
rated over the whole contract. Therefore, when such an ex- 
pense has been incurred under the belief that the whole con- 
tract would be finished, the contractor should be allowed that 
portion which he would have written off against the unexpired 
portion of the contract, 

Experimental Work 

A great many contracts entail considerable preliminary 
expense for experimental purposes. If this expense is in- 
curred only in connection with the contract, the same prin- 
ciple applies to plant rearrangement, i. e., the contractor should 
be allowed that portion of the expense which would have ac- 
crued to the unfinished part of the contract. 



CANCELLATION OF CONTRACTS 545 

Special Tools 

On practically every contract tools of a special character 
are used. If their cost is applicable to the whole contract, 
the item should be classed as one for reimbursement — as is the 
case with plant rearrangement and experimental work, dis- 
cussed above. 

Lease of Grounds or Building 

If the contractor, to facilitate the carrying out of the 
contract work, has leased grounds and buildings and cannot 
dispose of the lease without loss at the cancellation of the con- 
tract, he should be reimbursed for only that period of the 
lease which would cover the expected time required to com- 
plete the contract. The contractor could not claim any ex- 
pense for a lease extending beyond the period which the con- 
tract would naturally have run, unless an extra compensation 
were especially authorized in addition to the selling price in 
the contract. 

Occupancy 

When contract work necessitates an increase in plant 
facilities, compensation in the form of rent would be allowed 
for government buildings on the contractor's land and on the 
floor space occupied by machinery and equipment when such 
facilities are owned by the government. The compensation 
would continue until the government removed or otherwise 
disposed of the property in question. 

Contract for Service 

Various contracts for service may have been specifically 
entered into in connection with a fixed price contract, but if 
such service were limited and applicable only to the contract in 
question, then the contractor could claim whatever loss he 
might sustain for the unexpired portion of the contract. 



546 COST-PLUS CONTRACTS 

Organization Expense 

In a plant practically restricted to government work, the 
unlooked-for cancellation of contract work would result in a 
loss through inability to resume immediately ordinary com- 
mercial work. A claim for organization expense under these 
circumstances represents something tangible and it would seem 
that some portion of the contractor's administrative expenses 
incurred in resuming ordinary commercial work should be re- 
imbursed. 

Profits 

A possible claim for profits may be made by a contractor 
although the contract fails to recognize a claim of this char- 
acter. The question here arises: If a contractor is recom- 
pensed for actual loss, would that not also apply in some de- 
gree to losses of profit? Had the contract not been canceled, 
the contractor naturally would have made the same proportion 
and probably more profit on the uncompleted part of the work 
as compared with that completed. Moreover, his profit would 
be diminished in the interval between the cancellation of the 
contract and the resumption of normal business. Profit, how- 
ever, could not be claimed for both of these losses, as naturally 
the profit which is allowable on the one would include the 
other. 

Saving Clause in Contract 

Some straight price contracts may contain a clause which 
allows the contractor a percentage of the savings in the use of 
raw material furnished by the buyer, such saving being the 
difference between the estimated quantity of material and that 
actually used. In a case of this kind it would seem that a 
contractor is entitled to his percentage of savings on the com- 
plete contract, based on the average savings made for the com- 
pleted portion of the contract, providing that the saving clause 



CANCELLATION OF CONTRACTS 547 

was taken into consideration in fixing the contract price of 
the completed article. 

Cancellation of Fixed Profit Contracts 
Difference Between Fixed Price and Fixed Profit Contracts 

The distinction between a fixed price contract and a fixed 
profit contract is as follows : The fixed price contract simply 
states a selling price, the contractor assumes all costs, and his 
profit is the difference between his cost and the selling price. 
In a fixed profit contract, the contractor is reimbursed for all 
his costs under the contract and receives in addition a fixed 
profit for each article delivered. All of the elements as out- 
lined in connection with the fixed price contract would also be 
considered in connection with the fixed profit contract, except- 
ing that in this latter case they would be treated from a dif- 
ferent standpoint. 

It should be borne in mind that all regular expenditures 
incurred during the completed portion of the contract, and 
applicable thereto, should already have been taken care of. 
Therefore these items, if considered at all, should be con- 
sidered only in connection with the effect produced upon them 
by the cancellation of the contract. 

Inventory Items. As under a fixed price contract, com- 
pensation would be allowed and a fair proportion of profit de- 
termined by the percentage of profit applying to material and 
goods in process, taking into consideration the fixed profit on 
the article as a whole or according to the terms stated m the 
cancellation clause of the contract. 

Commitments. The treatment of this item would be the 
same as under a fixed price contract. 

Amortization. In connection with this item the con- 
tractor may be allowed reimbursement over the completed 
portion of the contract. 

Plant Rearrangement. The contractor may be allowed 



348 COST-PLUS CONTRACTS 

reimbursement with a percentage of profit on the completed 
portion of the contract. 

Experimental ]Vork, Special Tools, Leases, Contract for 
Sen'ice, and Organization Expense. In these cases the treat- 
ment would be the same as under a fixed price contract but the 
reimbursement would be for a fair proportion of the total 
amount chargeable to the completed portion of the contract. 
On the first three items enumerated a proper proportion of the 
profit might be allowed as in the case of inventory items. 

Profits. These would be treated in the same way as 
under a fixed price contract. 

It should be noted that the reimbursement of the above 
items depends solely upon their applying to a particular con- 
tract. If other contracts do not receive any benefit therefrom 
either before or after their cancellation, then the contractor 
should receive reimbursement for the total expenditures or 
total loss suffered. If, however, the expenditures on items 
of this character benefit other contracts either before or after 
the cancellation of the contract, then the contractor would be 
only entitled to a fair percentage of his expenditure or loss. 

Saving Clause 

Under some contracts the cost of the article to be manu- 
factured is estimated and is called normal cost. When the 
contractor succeeds in reducing this normal cost, he partici- 
pates in the saving thereof. Generally any fluctuation in the 
material prices requires that the normal cost be correspond- 
ingly revised. Some adjustment is necessary in this case 
where a contract is canceled. 

Cancellation of Cost-Plus Contracts 

Distinction Between Fixed Profit and Cost-Plus Contracts 

The difference between a fi.xed profit and a cost-plus con- 
tract is that expenditures under a fixed profit contract are re- 



CANCELLATION OF CONTRACTS 549 

imbursed only and the only profit allowable is on the article 
delivered; whereas in a cost-plus contract a profit is added to 
each item of cost directly incurred on contract work. 

Inventory Items. These would be treated in the same 
manner as in the other contracts, excepting that a percentage 
of profit would be allowed in addition to reimbursement, ac- 
cording to the terms of the contract. The regular expendi- 
tures on the completed portion of the contract should have 
already been taken care of. Therefore, the effect produced 
upon the value of the inventory by the cancellation of the 
contract should alone be considered. 

Commitments. These would be settled by reimbursement 
but no profit should be added. 

Profits. These should be treated in the same way as 
under the other two forms of contract. 

Amortization, Plant Arrangement, Experimental Work, 
Special Tools, and Leases on Grounds or Buildings. These 
items, if not adjusted before the cancellation of the contract, 
would be treated in the same manner as in a fixed profit con- 
tract — that is, reimbursement would be made but the profit 
allowed would be according to the terms of the contract. 

Contract for Service; Organization Expense. These 
should be reimbursed without profit. 

Saving Clause. This would be treated in the same man- 
ner as in the fixed profit contract. 



The views expressed in connection with the cancellation 
of contracts should be distinctly understood to represent only 
the author's personal opinion and are not and should not be 
considered as written in any official capacity whatever. 



INDEX 



Account classification, 

changes in, 448 
Accounting records, 

examination of, 437-438 
Accounts, 

factory ledger controlling, 308, 

315-337 
general ledger controlling, 293-314, 
328 

operation of in estimating cost 
systems, 463, 466, 468, 473, 
474, 476 
Accounts payable voucher, 247-250 
Forms, 247, 248 
invoices grouped, 249 
operation of, 248, 249 
pay-roll record attached, 249 
voucher check, 249 
Adjustments, 

discrepancies in cost, 335, 336 
factory ledger accounts and 

records, 335-337 
inventory, 335, 336, 378, 480 
Administrative expenses, 18, 19 
treatment under cost-plus con- 
tracts, 518 
Advertising, 
literature, aid to product classifi- 
cation, 42, 418 
Allowances to customers, 21 
Amortization, 
and depreciation, 154 
abnormal, 160, 161 
legal definition, 154-156 
government contracts, 542, 547, 549 
method of, data necessary for de- 
termining, 161 
Analysis, 
of inventory, 465, 466 



Form, 467 
of sales and costs, 286-288 

Form, 287 
Analysis record, 254-257 

Form, 256 
supplementary to voucher register, 

254. 255 
Application of cost principles, 10, 11 
Appraisal of plant assets, 394 
Article, 
cost, 
checking, 227, 228 
estimated, 460 
Assembling departments, 
cost-finding method applicable to 
29 
Attorney fees, 

treatment under cost-plus con- 
tracts, 538 

B 

Bad debts, 
treatment under cost-plus con- 
tracts, 538 
Balance sheet, 293 
comparative, 339 

Form, 341 
illustration of, 302 
preparation of, 301, 302, 306 
Betterments, 
treatment under cost-plus con- 
tracts, 497 
Bill of material, 84-86 
Form, 85 
order and process methods of cost- 
finding, 85, 86 
Bin records, 77, 78 

proof of, 445, 446 
Blue-prints, 
tracts, 533 



551 



.tj-' 



INDEX 



Bonus (See "Wape systems, bonus") 
Boot and shoe plants, 
cost-finding methods applicable 
to. 28 
Brokerage expenses, 

treatment under cost-plus con- 
tracts. 538 
Buildings, 

depreciation rates, 146, 147, 152 
mechanical equipment. 147 
Businesses, cost classification of, 400 



Cabinet shops, 

cost-finding method applicable to, 
26, 27 
Calculation blank, 221-224 

Form, 22}, 
Canceled check attached to accounts 

payable voucher, 249 
Cancellation of government con- 
tracts, 540-549, (See also "Govern- 
ment contracts") 
Carlin, Captain J. P., quoted on 
maximum percentage for overtime, 
158-160 
Cash, 

accounting for, 295-298 
Cash discounts, 
treatment under cost-plus con- 
tracts, 533 
Cartage inward (See "Freight and 

cartage inward") 
Catalogues, 
aid to product classification, 42, 418 
filing of, 71, 72 
Charges, 
direct, 13 

indirect, 16, 17 (See also "Over- 
head") 
to jobs, analysis of, 264 
Chr.rging factory expenditures, 243- 

265 
Charts, 
analysis of elements of cost, 23 
classification of — 

cost summary records, 292, 313, 

314 
factory departments, 41 



factory orders, 56 
labor reports. 121 
overhead. 183 
overhead reports, 197 
production reports. 208 

factory ledger controlling ac- 
counts, 330, 332 

financial and factory statements, 

374 
showing application of methods of 

cost-finding, 33 
showing handling of material and 
material reports, 95 
Chemical manufacturing plants, cost- 
finding methods applicable to, 21 
Classification of, 
accounts, changes in, 448 
departments, 35-40 
changes in. 448 
chart showing. 41 
enterprises-, 400-402 
inventor}', method of, 444 
product, 40, 42, 43, 418, 448 
at installation of cost system, 418 
changes in, 448 
Clerks, factory, 

charging salaries of, 133, 134 
Coal-mining, 
cost-finding method applicable to. 

Consignment records, 236 
Construction work, 
cost-finding m.ethod applicable to, 
25, 26 
Contracts, 
cancellation of government, 540-549 
(See also "Government con- 
tracts") 
cost-plus (See "Cost-plus con- 
tracts") 
Contract, wage system, 106 
Controlling accounts, 
factory ledger, 315-337 
adjustments, 335, 2,7,^ 
classification of, 315, 331-333 

Forms, 332, 333 
closing of accounts, ZZ^, 337 
discrepancies, treatment of, 335- 

2>zy 



INDEX 



553 



Controlling accounts — Continued 
factory ledger — Continued 

factory journal, 316 

form of, 331 

general ledger, 328, 329 

methods of keeping, 315 

summarizing chart, 330 

verification of accounts, 333-335 
finished stock, 307, 308, 323 

posting to, 324 
general ledger, 293-314 

arrangement of accounts, 308-310 

entering costs, 296-298 

grouping, 311- 312 

subsidiary ledgers or analysis 
records, 311, 312 
indirect expense, 325-327 

Forms, 326 
inventory, 299, 300, 303, 304 

divisions and subdivisions of, 
306-308 

factory ledger, 308 

methods of valuing merchandise, 
299, 300 

proving balances, 306, 307 
part-finished stock, 320-322 

posting to, 322, 323 
productive labor, 324, 325 
raw miaterial, 306, 307, 316, 317 

posting to, 317, 318 
work in process, 307, 308, 318, 319 
Forms, 321 

posting to, 319, 320 

special and standard products, 
318 
Control of cost records, 293-337 
cash transactions, 295-298 
chart of cost summary records, 

313, 314 
illustration of ledger accounts, 

296-298 
income and expense accounts, 

294-337 
methods of, 293 

pay-roll and pay-roll analysis, 29S 
purchase transactions, 294, 295 
records of sales transactions, 295 
Cost, 

classification of enterprise, 400 



compilation, examination of meth- 
od of, 436 
elements of (See "Elements of 

cost") 
factory, 20 
ledger, 315 

material (See "Material, cost") 
of sales, 
method of ascertaining, 454 
method of obtaining, 457 
recording estimated costs-, 478 
records, 276-281 

sales and cost of sales records 
combined with shipping order, 
276, 280 

Forms, 278, 279 
shipping records, 276 

Form, 277 
summary, 283, 464 

Form, 463 
treated separately, 280 
period, 243 

principles, application of, 10, li 
product (See "Product, cost") 
Cost accountant, 
need of, 399 
work of, 400 
Cost accounting, 

functions and province of, 4, 5 
relation to general accounting, 5 
Cost conference, 
recommendations of interdepart- 
mental, 487-494 
forms and methods, 493 
summary of recommendations, 493 
Cost department, 
examination of, 428 
ledger, 315 
Cost-finding, 

importance of, 3 
methods of, 24 
chart showing application of, 33 
order (See "Order method of 

cost-finding") 
process (See "Process method of 
cost-finding") 
requirements of, 24 
uniform methods of, 11 (See also 
Cost methods, uniform") 



554 



INDEX 



Cost-finding — Continued 
uniform methods of — Continued 

advantage of, 12 

out-growth of trade associa- 
tions, II 

uniform selling price insured 
by, 12 
Cost methods, 
haphazard, examples of, 482, 483 
uniform, 481-486 

advantages of, 481, 482 

selling price based on, 481, 482 

standardizing costs, 483-485 
Cost of returns summary, 285, 286 
Cost-plus contracts, 487-539 
additions and special facilities, 

treatment of, 497 
administrative expense, treatment 
of, 518 

salaries, 518 
betterments and equipment, treat- 
ment of, 497-501 

additions, 497 

fixtures, 499 

freight and express on equip- 
ment, 500 

housing of laborers, 501 

monorail system, 501 

office furniture and fittings, 499 

rebuilding, 499 

renovating, 499 

setting up machines, 501 

special equipment, 499 

special facilities, 497 
bonus payments, treatment of, 519 
cancellation of, 548 (See also 

"Government contracts") 
changes in specifications, treatment 

of, 537 
deferred overhead charges, 517 

preliminary expenses, 517 
depletion, treatment of, 528 
depreciation, treatment of, 528 
fair terms, what constitutes, 488 
fixed price, 488 
fixed profit plan, 491 
forms and methods, 493 
freight, treatment of government 

taxes on, 524 



idle and waiting time, treatment 

of, 514-515 
insurance, treatment of, 521-524 
items not chargeable unless ap- 
plicable to, 538, 539 
material and supplies items, treat- 
ment of, 

drayage, 504 

inventory adjustments, 504 

obsolete material, 503 

overs, 503 

packing supplies, 504 

shortages, 503 

spare parts, 505 

transfers of inventory items, 505 
miscellaneous items, treatment of, 
533-539 

blue-prints, 533 

cash discount, 533 

defective work, 534 

drafting expense, 534 

employment department, 534 

experimental expense, 534 

intercompany expenses, 535 

patents, 535 

rental, 535 

royalty, 535 

scrap waste, 536 

selling expense, 536 

testing expense, 536 

training employees expense, 536 

welfare work, 536 
normal costs, 494 
overhead, treatment of, 

direct and indirect distribution, 
516 

distribution over broken cost 
periods, 516 

products made in bulk, 517 
overtime, treatment of, 513 
pensions, treatment of, 520 
police protection, treatment of, 531 
purchase-and-sale contract, form 

of, 490 
relations between government and 

contractor, 491 
repairs and renewals, treatment 

of, 501-502 
special rulings, 497 



INDEX 



555 



taxes, treatment of, 521 
terms of contract, 496 
tools, treatment of, 507-509 

asset tools, 507, 512 

classification of, 508 

distinction between tools and 
machines, 507 

handling, 510 

identification, 513 

method of accounting for, 512 
Form, 511 

perishable, 512 

repairs and replacements, 513 

salvage of, 512 

scrap value of, 508 

storage, 510 

treatment of interest on, 524 
borrowed money, 525 
equipment, 527 
inventories, 526 
plant, 527 
working capital, 526 

Cost records (See also "Cost sheets," 

"Stock records") 
and financial records, interlocking, 

5, 300-337 
control of (See "Control of cost 

records") 
scope of, 5 
summarizing (See "Summarizing 

cost records") 

Costs, 
advantages of showing separately, 8 
article, estimated, 460 
checking, 227, 228 
cost sheet basis for charging to 

stock accounts, 211 
defective work, summary of, 272 
departmental analysis of, 485 
detailed summary of, 218-221 

Forms, 219, 220 
estimated (See "Estimated costs" 

also "Estimating cost systems") 
machine, statement of, 371 

Form, 372 
manufacturing, 13-23 
material, 91-93 



posting to cost sheets (See "Cost 

sheets, posting") 
sales records combined with, 286- 
288 

Form, 287 
shop order, summary of, 270, 272 

Form, 271 
standardizing, method of, 483-485 
statement of, 366, 368 

Forms, 367, 369 
time of compiling, 226, 227 
Cost sheets, 211-230 
classification chart of, 229 
compilation of, 408 
controlled by work in process 

accounts, 318 
copy of production order used as, 

60, 61 
departmental, 216-218 
Forms, 216, 217 

conditions under which used, 218 
details shown on, 215 
envelope form, 224, 225 
filing, 230 
form of, 211 
headings, 

information contained in, order 
method, 214 

preparation of, 214 
inventory of work in process, 

215, 233 
job or order, 212 
posting, 224-227 

labor reports, 225 

material reports, 224, 225 

mechanical aids for, 226 

overhead costs, 225, 226 

quantities, 226 

time of compiling data, 226, 227 
procedure in handling, 228, 229 
process method, 212-214 
Form, 213 

labor and overhead costs com- 
bined, 226 
progressive, 221 

Form, 222 
scope of, 211 
simple form of, 215 

Form, 216 



556 



INDEX 



Cost sheets — Continued 
summarizing, 
adjustments. 228 
records connect with stock re- 
ports, 242, 243 
summary of costs, detailed, 218-221 

Forms, 219, 220 
tag or ticket form of, 215, 216 

Form, 216 
verification of, 335 
Cost summarizing records, 242-292 
charging factory expenditures, 

242-265 
chart showing, 291 
cost of sales, 276-288 
analysis of sales and costs, 286- 
288 
Form, 287 
cost of returns summary, 285-286 
return credit record, 283-285 

Forms, 284, 285 
sales records, shipping and bill- 
ing records combined with, 

276-281 
Forms, 277, 278, 279 
sales summary, 281-283 
Form, 282 
defective work, 272 
departmental material used, 269 
departmental transfers, 
labor, 269- 270 
material, 269 
examination of, 437 
material requisition, 266-269 
Form, 267 
combined with distribution rec- 
ord, 268 
overhead distribution, 272-274 

Form, 273 
posting, 409 
preparing, 243, 409 
purpose of, 242, 243 
shop order costs, 270-272 

Form, 271 
stock transfers, 269 
summary of material received, 
258-261 
Form, 258 



summary of production, 275 
Form, 274 

transfers within the factory, 266> 
275 
Cost systems, 

advantages of, 8-10 

discrepancies, treatment of, 335 

elementary, 451-458 
applied to several product classi- 
fications, 455 

kinds of, 410 

method of starting, 442-447 
classification of inventory, 443 
classification of product and de- 
partments, 448 
overhead distribution, 447 
reports and records, 448 
starting factory orders, 446 
test of records, preliminary, 442 

objections to, 5-7 
Cost systems, method of installing, 

7, 399-449 
accounting records, examination 

of, 437-438 
adjustment to existing conditions, 

404 
auxiliary mechanisms, examination 

of, 440 
examination of departments, (See 

"Departments, examination of") 
examination of existing system, 415 

efficiency details, 417 
information, 

method of obtaining, 441 

miscellaneous, required, 439 
internal problems, 402 
introduction of estimating sys- 
tem, 404 
labor reports, examination of, 433 
overhead items, examination of, 434 
procedure for examination of 

plant, 418 
product classification, 418 
production records, examination 
of, 435 

cost compilation, method of, 436 

cost summarizing, 437 

finished parts, 435 

finished stock, 435 



INDEX 



557 



Cost systems, methods of installing 
— Continued 
red-tape pitfalls, 405 
reports, 

for executives, 403 
of method, 413 

statements, examination of, 438 
summary of procedure, 406 
charging factory, 407 
charging production to stock, 

400 
compiling costs, 408 
costing sales, 409 
crediting production, 408 
delivering material, 408 
distributing overhead, 409 
preparing and posting summar- 
ies, 409 
preparing and proving trial bal- 
ance, 410 
preparing statements, 410 
proving pay-rolls, 407 
proving the subsidiary records, 

410 
receiving and storing material, 
407 
Cost tag, 215, 216 

Form, 216 
Credit for material returned, 86, 88 

Form, 87 
Crediting, 
merchandise returned, 283-285 

Forms, 284, 285 
work done for administrative and 
selling departments, 288 



Day-rate wage system (See "Wage 

systems, day-rate") 
Defective work, 
charging, 

overhead, reports for, 190 
time spent on, 134 
costs, summary of, 272 
recording, 134 
repair or disposal of, 52 



reports, 204-206 
Forms, 205 

treatment under cost-plus con- 
tracts, 534 

Deferred charges, 
applicable to cost-plus contracts, 

517 
Departmental, 
analysis of costs, 485 
and product classification, 35-43 
cost sheets, 216-218 

Forms, 216, 217 
divisions, designation of, S7, 38 
material report, 88 

Form, 89 
material used, summary of, 269 
storerooms, stock records for, 233 
transfers of labor, 269, 270 
transfers of material, 186 

material transfer reports, 89, g? 
Form, 90 

summary of, 269 
Departments, 
administrative, 

crediting work done for, 28S 
examination of, 419-431 

cost, 428 

dry kilns, 425 

estimating, 428 

foundry, 424 

packing, 427 

plating, 425 

power, 426 

purchasing, 430 

receiving, 431 

sales, 419 

shipping, 427 

stores, 431 

wood-working, 425 
factory, classification of, 35-40 

changes in, 448 

chart showing, 41 
miscellaneous, 39 

distribution of expenses, 39 
non-productive, 38 

distribution of expenses, 38 
productive, 36-38 

basis for establishing, 36 



558 



INDEX 



Departments — Continued 
productive — Continued 

"center" grouping of opera- 
tions, 36 
designation of departmental di- 
visions, 37 
proving estimated costs by, 475, 

476 
purchasing (See "Purchasing de- 
partment") 
sales (See "Sales department") 
Depletion, 

treatment under cost-plus con- 
tracts, 529 
Depreciation, 
and amortization, 154 
abnormal, 160, 161 
legal definition, 154-156 
charging off, method of, 153, 154 
charging to machines, 175 
distribution, fixing rate for, 144 
effect of overtime on, (auditor 
fteel company quoted), 156-158 
fixed charge, 190, 191 
rates, 
building, 146, 147 
equipment, mechanical building, 

147 
equipment, miscellaneous, 150, 151 
equipment, plant, power, etc., 

147, 148 
factors to consider, 145 
group, 152, 153 
land, 146 

machinery, 149, 150, 152, 153 
method of obtaining, 144 
plant assets, 398 
schedule of, 145-151 
special machinery, 153 
standard, basis of, 151 
tools and dies, 150, 152, 153 
repairs and renewals, effect of, 

144, 145 
treatment under cost-plus con- 
tracts, 528 
method of figuring, 530 
Design of forms, reports, records, 

etc., 411 
Dies, valuation of, 398 



Discounts, 
cash, 21-23 
trade, 21 
Distribution, 
of overhead (See "Overhead") 
record, 254-257 
Form, 256 
Donations, 
treatment under cost-plus con- 
tracts, 538 
Drafting expense, 

treatment under coS't-plus con- 
tracts, 534 
Drayage, 
chargeable to cost-plus contracts, 
504 
Dry kilns, examination of, 425 



E 



Efficiency, 
importance of, I 

of factory, increased by standard- 
ized units of production, 49 
progress of, 2 
through trade associations, 11 
Elements of cost, 13-23 
administrative expenses, 18, 19 
chart showing analysis of, 22 
direct charges, 13-16 
indirect charges, 16, 17 (See also 

"Overhead") 
packing expense, 17 
relation to selling price, 19, 20 

diagram showing, 20 
selling and shipping expenses, 18 
Employees, 
absence and tardiness, record of, 
117, 118 
Form, 118 
office, salaries entered on separate 
record, 265 
Employment department, 
treatment under cost-plus con- 
tracts, 534 
Entertainment expenses, 
treatment under cost-plus con- 
tracts, 538 



INDEX 



559 



Equipment, 
changes, statement of, 349 
depreciation rates, 147-153 
building equipment, mechanical, 

147, 152 
miscellaneous equipment, 150, 

151 
plant, power, and large equip- 
ment, 147-149, 152 

interest on, chargeable to cost- 
plus contracts, 527 

transfer between departments, 396 

treatment under cost-plus con- 
tracts, 499 

valuation of, 391 
Estimated costs, 

and actual costs, accounts showing 
difference between, 463 

cost sheets used for, 216-218 
Forms, 216, 217 

of sales, summary of, 462 
Form, 464 

schedules of, 221-224, 462 
Forms, 223, 463 

verification of (See "Estimating 
cost systems") 
Estimating cost systems, 459-480 

adjusting inventory, 480 

advantages of, 460 

features of, 459, 460 

method of operating, 460, 461 

verification by lots or groups, 470- 

475 
analysis of opening inventory, 

472 
labor costs, 471, 472 
ledger accounts, operation of, 

473, 474 
method of, 474 
overhead costs, 472 
raw material costs, 471 
special records required, 470, 471 
verification by operating depart- 
ments, 475-480 
charges for expenditures, 477, 478 
crediting production, 478 
general ledger accounts, 476 
method of, 479, 480 
recording cost of sales, 478 



special forms required, 475, 476 

verification of material, labor, and 

overhead estimates, 465-470 

analysis of inventory, 465, 466 

Form, 467 
ledger accounts, operation of, 

466, 468 
method of, 468-470 
special records required, 465 
Forms, 463, 464 
verification of total costs, 462-465 
general ledger accounts, 463 
method of, 464, 465 
special records required for, 462 
Forms, 463, 464 
Estimating department, examination 

of, 428 
Examination of plant, 414-441 (See 
also "Departments, examination 
of") 
Expense, 
administrative, 18, 19 

treatment under cost-plus con- 
tracts, 518 
deferred, 

treatment under cost-plus con- 
tracts, 517 

direct, 13, 15, i6 

distribution over cost-plus con- 
tracts, 516-539 (See also "Cost- 
plus contracts, overhead distri- 
bution") 

general operating, 39, 40 (See also 
"Overhead") 

indirect, 16, 17 (See also "Over- 
head") 

packing, 17 

preliminary, 

treatment under cost-plus con- 
tracts, 517 

selling, 18 
Experimental work, 

charging time spent on, 134, 135, 
190 

expense departmentalized, 38 

treatment, 

under cancellation of govern- 
ment contracts, 544, 547, 549 
under cost-plus contracts, 534 



56o 



INDEX 



F 



Factory, 

charges, source of, 407 

cost, 20 

departments (See "Departments, 
factory") 

expenditures, charging, 244-265 

expenses, statement of, 370 
Form, 371 

ledger, 

controlling accounts, 308-310 
(See also "Controlling ac- 
counts, factory ledger") 
posting from pay-roll analysis, 
262-264 

method of crediting, 408 

orders, 45-46 (See also "Orders, 
factory") 

overhead (See "Overhead") 

production orders, 
examination of, 429 
starting new orders, 446 
Federal Trade Commission, 

recommendations of, as to cost- 
plus contracts, 487 
Filing, 

catalogues, 71, 72 

cost sheets, 230 

orders, 
production, 60, 6l 
purchase, 70 
sales, 64 

price lists and quotations, 71, 72 

reports, 
labor, 125 
material, 97 
production, 209 

stock records, 241 
Financial records and cost records, 

interlocking, 5, 300-337 
Financial statements (See "State- 
ments") 
Finished parts, 

inventory, pricing of, 389 

part-finished stock, distinction be- 
tween, 51 

production orders for, 50, 51 

records, examination of, 435 



stock records, 234 

Finished stock, 
controlling accounts, 307, 308, 323 

posting to, 324 
inventory, pricing of, 389 
production orders for, 50, 51 
records, 234 
examination of, 435 

Fixed charges, 190, 191 
depreciation, 190, 191 
insurance, 190, 191 
interest, 190, 191 
rent, 190, 191 
Form, 191 
taxes, 190, 191 

Fixed price contracts, cancellation of, 
541 (See also "Government con- 
tracts") 

Fixed profit contracts, cancellation 
of, 546 (See also "Government 
contracts") 

Fixtures, treatment of, 397 

under cost-plus contracts, 499 

Flasks, valuation of, 398 

Foodstuffs, manufacture of, cost- 
finding method applicable to, 32 

Foremen, 

charging time of, 132, 189 
salaries entered on separate record, 
265 

Forms, design of, 411 

Foundries, cost-finding method ap- 
plicable to, 30 

Foundry department, examination 
of, 424 

Freight, 
and cartage inward, charging to 

overhead, 141, 142, 195 
and express on equipment, for 

cost-plus work, 500 
government taxes on, treatment 
under cost-plus contracts, 524 



Gain-sharing, wage system, 105 
Gantt plan, wage system, 103 
Garment manufacturing plants, cost- 
finding methods applicable to, 27 



INDEX 



56 1 



General ledger, 
accounts, 

estimating cost systems, 464, 466, 

468, 473, 474, 476 
on factory ledger, 328, 329 
entering controlling accounts, 296- 
298 
Gifts, method of charging, 130, 131, 

379 
Government contracts (See also 
"Cost-plus cQTitracts") 

cancellation of, 540-549 
amortization, 542, 547, 549 
commitments, 542, 547, 549 
experimental work, 544, 547, 549 
general considerations, 540 
inventory valuation, 541, 548 
leases, 545, 549 
occupancy, 545 

organization expense, 545, 549 
plant rearrangement, 544, 547 
profits, 545, 548 
special books, 544, 547, 549 
survey clause, 546, 548, 549 

distinction between, 

fixed price and fixed profit, 546 
fixed profit and cost-plus, 548 
Guard house and equipment, 

cost of, chargeable to cost-plus 
contracts, 532 

H 

Hat manufacturing plants, 

cost-finding methods applicable to, 
27, 28 
Heat (See "Power, light, heat") 
Helpers, charging time of, 132, 188 
Housing of work people, treatment 

under cost-plus contracts, 501 



Ice manufacturing plants, cost-find- 
ing method applicable to, 32 

Idle time (See "Time, lost and idle") 

Income tax, 
treatment under cost-plus con- 
tracts, 524 



Indirect, 
expense (See "Overhead") 
labor (See "Overhead") 
material (See "Overhead") 

Inspection, 
charging time of, I33, 189 
expense departmentalized, 38 

Installation of a cost system, 399-413 
(See also "Cost systems, method 
of instaUing") 

Insurance, 
distribution of charges, 136, 137 
fixed charge, 190, 191 
provision for plant assets, 398 
treatment under cost-plus con- 
tracts, 521-524 

Interdepartmental cost conference, 
recommendations of, 487-492 

Interdepartmental material reports, 

91 

Form, 90 
Interest, 

distribution of, 138-140 

including as cost, 
advisability of, 138, 139 
method of, 140 

on mortgage, 

charging to overhead, 136, 137 
fixed charge, 190, 191 

treatment under cost-plus con- 
tracts, (See "Cost-plus con- 
tracts") 
Interlocking and agreeing reports, 

376 
Interlocking financial records with 

cost records, 5, 300-337 
Inventory, 

adjustments, 335, 336, 378, 480. 504 
under cost-plus contracts, 504 

analysis of, 303, 304 
Form, 467 

balances, entering on stock records, 

239 

classification, method of, 443 

controlling accounts (See "Con- 
trolling accounts") 

cost systems provide, 8 

interest on, chargeable to cost-plus 
contracts, 527 



562 



INDEX 



Inventory — Continued 
merchandise, comparative state- 
ments, 349 
Form, 350 
methods of taking, 377-391 

checking. 390 

figuring. 390 

instructing employees, 382 

listing, 386 

pricing, 232, 387, 388 

preparation, 381 

proving, 93, 232, 303, 306, 307, 
378, 390, 445 
Form. 93 
opening, analysis of, 472 
perpetual. 94 (See also "Stock 
record") 

advantages of, 231 

factory ledger accounts, 336 

stock records provide, 81, 231 
physical, 379 
power plants, small, 194 
raw material, 92-94 

Forms, 93, 94 
sheet, 93, 379 

Forms, 94, 380 
tag method, 384 

Form, 385 
transfers of items under cost-plus 

contracts, 505 
valuation, 

closing, 451 

merchandise, 299, 300 

under government contracts, 541, 

548 
Invoice book, 245, 247 
Invoices, 
estimated costs entered on, 478 
from creditors, 76 
checking, 76 
Form, 77 
purchase (See "Purchase invoices") 
used as stock record for outside 
work, 238 



Job cost-tickets (See "Cost sheets") 
Job method of cost-finding, 25 (See 



also "Order method of cost-find- 
ing") 
Journal, 

entries, 288, 291, 316 

Form, 290 
vouchers and standing journal 
entries, 288-291 
Forms, 289, 290 



Labor, 

direct, 15 (See also "Labor, pro- 
ductive," below) 

indirect, 16, 17 (See also "Over- 
head, labor, indirect") 
Labor, productive, 

classification of, 108 

controlling accounts, 324 

departmental transfers of, 269, 270 

estimated costs, verification of, 
465-470 

Forms, 463, 467 

grouped operations, 471, 472 

method of reporting, 110-112 

mechanical devices, no, in, 113 
standardized forms, in 

outside and inside the plant, 108 

reports. 109-125 

calculating. 123, 124 

chart showing classification, 121 

collecting. 123 

combination reports for groups, 

113 
combined with production orders, 

59-61 
disposition of indirect time 

appearing upon, 112 
examining, 123 
filing, 125 
indicating accounts' to be charged, 

124 
information furnished, 113 
pay-roll, 259-261 

Form, 260 
pay-roll analysis, 261-264 

Form, 263 
pay-roll exception, 117, 118 

Form, 117 



INDEX 



563 



Labor, productive — Continued 
reports — Continued 
pay-roll summary, 265 
posting to cost sheets, 225 
posting to pay-roll and cost 

records, 125 
preparing, 122 
pricing, 123 

procedure for handling, 122-125 
production order combined with, 

116, 117 
purposes of, 109 
rate records, 119, 120 

Form, 120 
requirements of, 112-114 
time, 11S-117 

Forms, 114, 115, 116 
transfer, 118, 119 

Form, 119 
used as production reports, 204 
verbal, inadequate, 112 
wage rate records included on, 
119, 120 
Form, 120 
standardization of costs, 484, 485 
time of reporting, 109, no 
transferring to non-productive 
work, 188 
Land, depreciation rates, 146 
Life insurance premiums, 

treatment under cost-plus con- 
tracts, 523 
Light (See "Power, light, heat") 
Lot or group costs, estimated (See 

"Estimating cost systems") 
Lost and idle time (See "Time, lost 
and idle") 



M 



Machine, 
costs, statement of, 371 

Form, 372 
installation, 
treatment under cost-plus con- 
tracts, 499 
Machine-cost method, 30 (See also 
"Process method of cost-finding") 



Machine-rate methods, overhead dis- 
tribution, 173-178 

application of, 173, 174 

compiling rate, 175, 176 

fixed machine rate, 177 

forms of, 174 

sold-hour method, 177, 178 
Machinery, 

depreciation rates, 149, 150, 152, 
153 
Machines, 

constructed on plant, valuation of, 

395 
installation, expense of, 39s 
treatment of, 

construction cost, 39S 
cost of transfer, 396 
valuation of parts, 397 
Maintenance, repairs and renewals, 
charged against depreciation, 161, 

162 
effect on depreciation, 144, 145 
method of recording charges, 192, 

193 
summary of maintenance and re- 
pair costs, 270-272 
Form, 271 
Manufactured parts, 51 
Manufacturing ledger, 315 
Manufacturing statement, 343-348 

Forms, 344, 345 
Material, 
bill of, 84-86 

Form, 85 
cost, 
methods of figuring, 91, 92, 93 
storeroom overhead added to, 
91, 92 
delivery to operation, 408 
direct, 13, 14 

estimated costs, verification of, 
465-470 
Form, 467 
handling, procedure in, 65 
indirect, 16 (See also "Overhead, 

material indirect") 
inventory (See "Inventory") 
issuance of, 82 



564 



INDEX 



Material — Continued 
issued, 

disposition of, 88 
reporting, 88, 91 

Form, 89 
pricing, 91, 92, 93 
methods of figuring fluctuating 

costs, 92. 93 
scrap material, 91 
purchasing, 65 
raw (See "Raw material") 
receiving record, 72, 73, 407 

Form, 73 
records (See "Stock records") 
reports, 66-97 
calculating, 97 
chart showing classification of, 

96 
collecting, 95 
departmental, 88 

Form, 89 
departmental transfers, 186 
designating accounts to be 

charged and credited, 97 
examining, 95 
filing, 97 
for charging factory overhead, 

185-188 
interdepartmental, 91, 186 

Form, 90 
material received, 74-76 

Form, 75 
material received, copies of pur- 
chase orders used as, 74- 76 
material transfer, 89, 90 

Form, 90 
material used, 88, 91 

Form, 89 
numbering, 95 

posting to cost sheets-, 224, 225 
pricing, 95, 97 
procedure in handling, 95-97 
purchase requisition, 66-68 

Form, 66 
posting to stock records, 97 
summarizing and proving for 

accounts, 97 
summary of departmental trans- 
fers, 269 



summary of material received, 

257-259 
Form, 258 
summary of material used, 269 
us«d as production reports, 
203, 204 
requisition (See "Requisition, ma- 
terial") 
returned credit slip for, 86 

Form, 87 
scrap, 

record of, 128 

direct and indirect charging of, 
127-129, 186, 187 
storing, 77, 407 
supplies, direct and indirect, 

charging of, 127, 186-188 
tools and dies, perishable, 

direct and indirect, charging of, 
129, 187 
transfer, 91, 186 

Form, 90 
treatment under cost-plus con- 
tracts, 503 
Mechanical aids for posting costs, 

226 
Mercantile business, cost systems for, 

401 
Merchandise inventory, comparative 
statement, 349 
Form, 350 
Merit plan, wage system, 105 
Metal-working plants, cost-finding 

method applicable to, 28, 29 
Miscellaneous, 
departments (See "Departments, 

miscellaneous") 
expenses, factory, 

distribution of, 142, 143 
factory orders, 52-54 (See also 
"Orders, factory, miscellaneous") 
overhead distribution methods, 178, 

179 
supplies, 127 
Molds, valuation of, 398 
Monorail system, 

treatment under cost-plus con- 
tracts, 501 



INDEX 



565 



Munitions Tax Law, Treasury De- 
partment, 
depreciation and amortization defi- 
nition, 154-156 

N 

Non-productive departments (See 
"Departments, non-productive") 

Non-productive labor (See "Over- 
head, labor, indirect") 

Normal costs under cost-plus con- 
tracts, 494 



Obsolescence, 154 
Obsolete material, 
treatment under cost-plus con- 
tracts, 503 
Obsolete stock, 
statement of, 361 

Form, 362 
record, 241 
Office furniture, 
treatment under cost-plus con- 
tracts, 499 
Operating departments (See "De- 
partments, productive") 
Operations, grouping of, "center," 36 
Order method of cost-finding, 24-29 
and process method, 24-34 

chart showing application to 
industries, 33 
applied to, 

assembling departments, 29 
boot and shoe plants, 28 
cabinet shops, 26, 27 
chemical manufacturing plants, 

31 

construction work, 25, 26 
garment manufacturing plants, 27 
metal manufacturing plants, 28- 

29 
paint and varnish manufacturing 

plants, 31 
plating shops, 26 
repair shops, 26 
straw and felt hat plants, 27 
wood-working plants, 28 



designation of order and produc- 
tion report, 200 
distinctive features of, 24 
Order numbers, 45, 54 
Order register, 60 

standing orders, 54 
Orders, 

factory, 45-64 
chart showing classification, 56 
miscellaneous, 52-54 (See also 
"Orders (factory), miscel- 
laneous" below) 
production, 47-52, 55-64 (See 
also "Orders, (factory) pro- 
duction" below) 
small, grouping of, 49, 50 
sub-production, 49 
purchase, 68-70 
Form, 69 
copies used as material received 

reports, 74-76 
filing and disposition of, 68, 70 
purchase requisition combined 

with, 70 
register of, 70 
Form., 71 
sales, fi-64 
Form, 62 
filing, 64 
registering, 63, 64 
shipping, 60, 61, 276-280 
Form, 277 
combined with billing and cost 
of sales records, 276-281 
Forms, 278, 279 
copy of factory order used as, 
60, 61 
stores (See "Requisition, mate- 
rial") 
verbal, inadequacy of, 45, 46 
written, 46, 47 
Orders (factory), miscellaneous, 52- 

54 
betterment, 53 
classification of, 52 
construction, 52, 53 
repairs, 53 
standing, 54 

charging time and material on, 54 



566 



INDEX 



Orders (factory), production, 48-52, 

53-64 
classification of, 48 
combined with material requisition, 

59. 60 
copies, number of, 57 
copy ustd as shipping order, 276 

Form, 277 
desipniiij? form for, 55 
development of, 58, 59 
duplicate copy, 

used as cost sheet, 60, 61 

used as shipping order, 60, 61 

examination of, 429 
filing and disposition of, 60, 61 
finished parts, 50, 51 
for manufacture of parts, 50, 51 
information to be included in, 

55. 57, 58 
issuance of, 55-57 
labor reports combined with, 59- 

61, 116, 117 
production report used as, 59-61 
quantities, designation of, 48, 49 
repairs to product, 52 
simple form of, 57, 58 

Form, 58 
special, 50 
standard, 50, 51 
starting new orders, 446 
tag and coupon system, 202, 203 
used as production report, 59-61, 

201 

Overhead, 

chart showing classification and 
distribution, 183 

classification of, 16, 17, 126 

controlling accounts, 304, 325-327 
Form, 326 

costs, uniform methods of treat- 
ing, 484, 485 

deferred charges, 517 

departmental application of, 126- 

143 
distribution of, 163-189, 409 
adjustment to changed condi- 
tions, 181-184 
adjustments of rate, 334 
bases of, 178, 179 



direct and indirect, 163, 164, 516 
fixed rates, 180 
fluctuating rates, 180, 181 
information necessary for estab- 
lishing methods, 434, 447, 448 
machine-rate methods, 173-178 
miscellaneous methods, 178, 179 
over cost-plus contracts, 516 
over products made in bulk, 517 
prime-cost method, 166-169 
productive-labor-cost method, 

169-171 
productive-labor-hours method, 

171-173 
sold-hour method, 177, 178 

entering costs on cost sheet, 225, 

226 
estimated costs, verification of, 

465-470 
Form, 467 

group method, 472 
expense items, 17, 135, 162, 190-197 

depreciation, 144-161 (See also 
"Depreciation") 

freight and cartage inward, 141, 
142, 195 

insurance, 136, I37. IQO. IQI 

interest, 138-140, 190, 191 

maintenance, repairs, and re- 
newals, 161, 162, 192-193 

miscellaneous expenses, 142, 143 

over, short, and damage, 142, 
195, 196 

power, light, heat, 141, 193-19S 
Form, 194 

rent, 136, 190, 191 
Form, 191 

taxes, 137, 190, 191 
general operating expenses, 39, 40, 

164, 165 
labor, indirect, 16, 17, 129-135, 188- 
190 

bonuses not based on produc- 
tion, 130 

defective work, employees on, 
134, 190 

experimental work, 134, 135, 190 

foremen, supervisors, 132, 189 



INDEX 



)67 



Overhead— Continued 
labor — Continued 
helpers, sweepers, truckers, re- 
pairmen, 134, 188 
inspection, 133, 189 
lost and idle time, 131 
salaries, factory clerks', 133, 134, 

189, 190 
superintendence, 132, 133, 189 
material, indirect, 16, 126-129, 185- 
188 
scrap or waste material, 127-129, 

186, 187 
supplies, 127, 187, 188 
tools and dies, perishable, 120, 
187 
miscellaneous departments, 39 
non-productive departments, 38 
records and reports, 185-196, 254- 
237, 259-264 
charging expense items, 190-196 

Forms, 191, 194 
classification chart of reports, 197 
deferred expense record, 196, 197 
distribution or analysis record, 
196, 254-257 
Form, 256 
fixed charges, 190, 191 
Form, 191 
pay-roll or pay-roll analysis, 
259-264 

Forms, 260, 263 
reporting time of non-productive 

labor, 188-190 
reports for recording indirect 

material, 185-188 
summary of distribution, 272-274 
Form, 273 
storerooms, 91, 92 
time factor of, 173 
Over, short, and damage, 

charging to overhead, 142, 195, 196 
Overtime, 
effect on depreciation, 156-158 
maximum depreciation percentage 
for (Captain J. P. Carlin, 
quoted), 158-160 
treatment under cost-plus con- 
tracts, 513 



Packing department, examination of, 

427 
Packing expense, 17 
Packing supplies, 
treatment under cost-plus con- 
tracts, 504 
Paint and varnish plants, cost-finding 

methods applicable to, 31 
Paper mills, cost-finding method 

applicable to, 30 
Part-finished stock, 50, 51 
controlling accounts, 320, 322 

posting to, 322, 323 
finished parts, distinction between, 

51 
production orders for, 50, 51 
Patents, 
treatment under cost-plus con- 
tracts, 535 
Patterns, valuation of, 398 
Pay-roll, 259-261 
Form, 260 
analysis, 261-264 
Form, 263 
charges to jobs, 264, 265 
posting to ledger, 262, 264 
purpose of, 261, 262 
classification, 265 
deductions from, 261 
exception report, 117, 118 

Form, 117 
method of keeping, 261 
period, cost period in agreement 

with, 243 
posting labor reports to, 125 
proving and charging, 407 
record attached to vouchers, 249 
summary, process method, 265 
Pensions, 
treatment under cost-plus con- 
tracts, 520 
Physical inventory, 379 (See also 

"Inventory") 
Piece-rate, 
wage plan (See "Wage systems, 
piece-rate") 



568 



INDEX 



Piece-work, 
wage systems (See "Wage sys- 
tems, piece-work") 
Plant, 
additions to, 

treatment under cost-plus con- 
tracts, 497 
and equipment, 

interest on, chargeable to cost- 
plus contracts, 527 
changes, statement of, 349 
examination of, 414-444 (See also 
"Cost systems, method of in- 
stalling") 
Plant assets, 
appraisal of, 398 

dies, molds, etc. considered as, 398 
fixtures, control of, 397 
machines, 

construction of, 395 
expense of installing, 395 
transfer, 396 

valuation of machine parts, 397 
statement of changes in value, 398 
tools treated as, 396 
control of, 397 
method of safeguarding, 397 
records, 391-398 
Forms, 3ry2, 393 
method of filing, 394 
purposes of, 394 
Plating room, examination of, 425 
Plating shops, cost-finding methods 

applicable to, 26 
Police protection, 
distribution of charges to cost-plus 

contracts, 533 
treatment under cost-plus con- 
tracts, 531 
Posting, 
charges and credits to stock rec- 
ords, 239 
from purchase record, 245 
labor reports to, 
cost sheets, 225 
pay-roll and cost records, 125 
material reports, 97, 224, 225 
to finished stock controlling ac- 
counts, 324 



to ledger from pay-roll analysis, 
262, 264 

to part-finished stock controlling 
accounts, 322, 323 

to raw material controlling ac- 
counts, 317, 318 

to work in process controlling 
accounts-, 319, 320 
Power department, examination of, 

426 
Power, light, heat, 

expense, distribution of, 141, 193- 

195 
Form, 194 
inventory, power plant, 194 
Predetermined costs (See " Estimated 

costs ") 
Premium plan, wage system (See also 

"Wage systems, premium") 
Premiums for life insurance, 

treatment under cost-plus contracts, 

523 
Price lists, quotations and records, 71, 

72 
Pricing raw material, 232 
Prime-cost method, overhead distri- 
bution, 166-169 

advantages, 168 

conditions under which inapplica- 
ble, 169 

disadvantages, 168 

rate, calculation of, 167 
Principles of cost-finding, 

application of, 10, 11 
Process cost records (See "Cost 

sheets") 
Process method of cost-finding, 

29-34 
and order method, 24-34 

chart showing application to 
industries, 33 
applied to, 

boot and shoe plants, 28 

chemical manufacturing plants, 

31 
coal mining, 32 
foodstuffs, manufacture of, 32 
foundries, 30 



INDEX 



569 



Process method of cost-finding — 

Continued 
applied to — Continued 

garment manufacturing plants, 
27 

ice manufacturing plants, 32 

paint and varnish manufacturing 
plants, 31 

paper mills, 30 

plating shops, 26 

rubber and celluloid manufactur- 
ing plants, 31 

straw and felt hat plants, 27-28 

treating departments, 32 

wood-working plants, 32-34 
cost sheet, 212-214 

Form, 213 
distinctive features of, 29, 30 
machine-cost method, 30 
pay-roll summary, 265 
production, 

orders, 49 

report, 200 

summary, 275 
Process pay-roll summary, 265 
Product, 

classification, 40-43, 418, 419, 448 

simple method of, 455 
cost, when scrap material is util- 
ized, 92 
designation of, 45 
disposition of, 207 
progress of, shown on production 

report, 201 
standard, orders for, 50-52 
Production, 
and shipments, statement of, 355 

Form,' 356 
charging to stock, 409 
costs, and estimated costs, accounts 

showing difference between, 463 
crediting, 408 
manager, reports to, 365 
orders, 48-52, 55-64 (See also 

"Orders (factory), production") 
recording, 304, 305 
reporting, 

method of, 198-209 



time of, 206 
reports, 
defective work, 204-206 

Form, 205 
examining, 209 

factory order used as, 59-61, 201 
filing, 209 
form of, 198 

handling, procedure in, 207-209 
labor reports used as, 204 
material reports used as, 203, 204 
order method of cost-finding, 200 
preparing, 207 
process method of cost-finding, 

200 
progress of product, 201 
purpose of, 198 
recording costs, 209 
simple form of, 199, 200 

Form, 199 
summarized, 305 
tag and coupon, 202, 203 
statement of, 355, 366, 368 

Forms, 356, 367, 369 
summary, 274, 275 
Form, 274 
process method, 275 
Productive departments (See "De- 
partments, productive") 
Productive labor (See "Labor, pro- 
ductive") 
Productive-labor-cost method, over- 
head distribution, 169-171 
applicability of, 170, 171 
rate, calculation of, 169, 170 
Productive-labor-hours method, over- 
head distribution, 171-173 
applicability and limitations, 173 
rate, calculation of, 171, 172 . 
Product method of cost-finding, 29 
(See also "Process method of cost- 
finding") 
Profit and loss statement, 342 
illustration of, 302 
preparation of 301, 302, 306 
Profit-sharing wage system, 106, 107 
Progressive cost sheet, 221 

Form, 222 
Proving inventory balances, 306, 307 



5/0 



INDEX 



Purchase, 
analysis, 245 
invoices, 
adjustments on voucher regrister, 

254 
entering in voucher register, 247 
listing and classifying, 247 

Forms. 247, 248 
method of handling, 244, 245 
posting from purchase record, 

245 
reports supporting, 244 
stamping, 244, 245 
Form, 244 
journal, 245 

orders (See "Orders, purchase") 
record. 245 
Form. 246 
combined with voucher register, 

254 
posting from, 245 
requisition, 66-68 (See also "Requi- 
sition, purchase") 
Purchasing department, 
examination of, 430 
reports to, 361-365 
maximum and minimum quanti- 
ties, 365 
Form, 366 
merchandise purchases, 362 

Form, 363 
obsolete raw materials, 365 
Form, 364 



Quantities, 

designation of, 48, 49 
maximum and minimum of stock, 
67 

R 

Rates, 

depreciation, I45-I53 (See also 
"Depreciation") 

overhead distribution (See "Over- 
head," ) 

overhead distribution methods, 
166-184 



adjustment to changed condi- 
tions, 181, 182 
fixed and fluctuating, 179-181 
machine-rate, 174-177 
miscellaneous, 178, 179 
prime-cost, 167 

productive-labor-cost, 169, 170 
productive-labor-hours, 171-172 
sold-hours method, 177, 178 
records, 119, 120 (See also "Wage 
rate records") 
Form, 120 
Raw material, 
controlling accounts, 306, 307, 316 
inventory pricing, 388 
records (See "Stock records") 
requirements, examination of, 429 
standardization of costs, 484 
storeroom, 316, 471 
verification of estimated costs, 471 
Real estate investment, 
treatment under cost-plu* con- 
tracts, 539 
Rebates, special, 21 
Rebuilding and renovating, 
treatment under cost-plus con- 
tracts, 499 
Receipt book, 72, 73 
Receiving, 
department, examination of, 431 
record, 72, 73 
Form, 73 
Recommendations of cost conference 

as to cost-plus contracts, 487-494 
Records, 
control of cost (Sec "Control of 

cost records") 
cost (See "Cost sheets," "Stock 

records") 
cost summarizing (See "Cost sum- 
marizing records") 
design of, 411 

overhead distribution (See "Over- 
head") 
stock (See "Stock records") 
Register, 
of purchase orders, 70 
Form, 71 



INDEX 



571 



Register — Continued 
of sales and costs, 286-288 
Form, 287 
Rent, 

distribution of, 136 
fixed charge, 190, 191 
Form, 191 
Rental charges, 
treatment under cost-plus con- 
tracts, 535 
Repairmen, 

charging time of, 188 
Repair shops, cost-finding method 

applicable to, 26 
Repairs to product, 52 
Reports (See also "Statements") 
design of, 411 

executive, interlocking and agree- 
ing, 376 
labor (See "Labor, productive re- 
ports") 
material (See "Material, reports") 
on method of installing cost sys- 
tem, 417 

production (See "Production") 
Requisition, 
material, 82-84 
Form, 83 
bill of, used as, 84-86 

Form, 85 
factory order combined with, 

59, 60, 84 
stock transfers, 269 
summary of, 266-269 
Form, 267 
purchase, 66-68 
Form, 69 
combined with purchase order, 70 
disposition of, 27 
prepared by, 67, 68 
Reserves, 
chargeable to cost-plus contracts, 
539 
Return credit record, 283-285 

Forms, 284, 285 
Returns summary, 285, 286 
Royalty, 
treatment under cost-plus con- 
tracts, 535 



Rubber and celluloid plants, cost- 
finding method applicable to, 31 



Salaries, 
clerks', charging overhead, reports 

for, 189, 190 
summary of, 265 

treatment under cost-plus con- 
tracts, 518 
Sales, 
accounting for, 295 
and cost of sales statement, 355, 
358 

Forms, 357, 359, 360 
confidential cost information, 280 
costing of, 409 
department, 
crediting work done for, 288 
examination of, 419 
reports to, 352 
orders (See "Orders, sales") 
records, 276-280 

Forms, 278, 279 
cost of sales combined with ship- 
ping and billing records, 276- 
281 

Forms, 278, 279 
estimated costs entered on, 478 
return credit, 283-285 

Forms, 284, 285 
special allowances to customers, 
283-285 
summarizing cost of, 276-288 
analysis of sales and costs, 286- 
288 

Form, 287 
cost of returns summary, 285, 

286 
cost of sales summary, 283, 464 

Form, 463 
returns summary, 285, 286 
sales records, shipping and bill- 
ing records combined with, 
276-281 

Forms, 277, 278, 279 
sales summary, 281-283 
Form, 282 



57^ 



INDEX 



Salesmen's expenses, 
statement of. 352 
Form, 354 
Sample expense, 379 
Scrap or waste material, 
applying value of to product, 92 
charged to factory overhead, 127- 

129, 186, 187 
direct material charge, 127, 128 
stock record, 128 
tools, cost-plus work, 508 
treatment under cost-plus con- 
tracts, 536 
utilization of, 128, 129 
Selling expenses, 18 
treatment under cost-plus con- 
tracts, 536 
Selling price, 19, 20 
based on, 

estimated costs, 181, 228 
uniform cost methods, 481, 482 
cost-sheets basis for establishing, 

211 
deductions allowed from, 21-23 
relation to cost elements, 20 

Form, 20 
uniform, 12 
Semi-finished goods stock records, 

238 
Services of expert, 

when chargeable to cost-plus con- 
tracts, 539 
Shipping, 
department, examination of, 428 
orders (See "Orders, shipping") 
Shipments, 
costing of, 409 
statement of, 355 
Form, 356 
Shortages, 
treatment under cost-plus con- 
tracts, 503 
Sold-hour method, overhead distri- 
bution, 177, 178 
Spare parts, 

cost-plus contracts, 505 
Special-order method of cost-finding, 
25 (Sec also "Order method of 
cost- finding") 



Specifications, 

treatment of changes in, under 
cost-plus contracts, 537 
Standardization of production, 

cost systems provide data for, 10 

Standard operation, wage system, 105 
Starting a cost system (See "Cost 

systems") 
Statements, 
chart of factory and financial, 374 
comparative balance sheet, 339 

Form, 342 
comparative merchandise inven- 
tory, 349 

Form, 350 
costs and production, 366 

Form, 367 
examination of factory and finan- 
cial, 437-438 
factory expenses, 370 

Form, 371 
financial, 298, 299, 338-376 
kinds of, 338 
labor statistics and costs, 368 

Form, 369 
machine costs, 371 

Form, 372 
manufacturing, 345-348 

Form, 347 
method of, 

filing, 375 

preparing, 452 

presenting, 373 
need of comparative analytical, 406 
obsolete stock, 361 

Form, 362 
plant and equipment charges, 349 
preparation of, 338 

factory and financial, 410 
production and shipments, 355 

Form, 356 
profit and loss, 342 

illustration, 302 

preparation of, 301, 302, 306 
reports to purchasing department, 

maximum and minimum quanti- 
ties, 365 
Form, 366 



INDEX 



573 



Statements — Continued 
reports to purchasing department 
— Continued 
merchandise purchases, 362 

Form, 363 
obsolete raw materials, 365 
Form, 364 
sales and cost of sales, 355, 358 

Forms', 357, 359, 360 
sales department reports, 352 
salesmen's work, 353 

Form, 354 
style and ruling, 375 
time of presentation, 376 
trading, 348 
Stint plan, wage system, 105 
Stock, 
available for unfilled orders, rec- 
ord of, 235, 236 
Form, 237 
charging production to, 409 
distributing, wage system, 106 
maximum and minimum quantities 

of, 67 
obsolete, 

filing and disposition of records, 

241 
statement of, 361 
Form, 362 
pricing, methods of, 232 
transfers, summary of, 269 

Stock records, 78-82, 231-241 
Form, 78 

adjustments of, 232 

classification of, 231 

consignment, 236 

designing and verifying, 81, 82 

effectiveness of, 80 

finished parts, 234 

finished stock, 234 

form of, 240, 241 

functions of, 80, 81 

inventory, perpetual, 81, 231 

invoices used as, 238 

material sent to outside con- 
tractors, 238 

method of keeping, 231, 232 



obsolete stock, 241 

procedure in handling, 238-241 
entering inventory balances, 239 
filing, 241 

posting charges and credits, 239 
testing, proving, and adjusting, 
239, 240 

raw material, 233 

reference numbers and letters, 80 

reports furnishing data for, 239 

S€mi-finished goods, 238 

separate for each storeroom, 82 

simple types of, 234, 235 
Forms, 235, 236 

stock available for unfilled orders, 
235, 236 
Form, 237 

work in process, 233 
Storerooms, 

charging overhead, 91, 92 

department, exariiination of, 431 

departmental, stock records for, 233 

ledger accounts, 

proof of entries, 445 

location and arrangement of, 80 

order (See "Requisition, mate- 
rial") 

product classification, aid in estab- 
lishing, 43 

raw material, 316, 471 

controlling accounts for, 307 

recording transfers of material 
from, 269 

stock records for, 82 
Storing material, 77, 407 
Sub-production orders, 49 
Subsidiary records (See "Stock 
records") 

proving, 410 
Summarizing records (See "Cost 

summarizing records") 
Summary of, 

cost-finding methods, 34 
chart, 33 

cost summarizing records, chart 
showing, 292 

defective work costs, 272 

departmental, 

material used, 269 



574 



INDEX 



Summary of — Continued 
departmental — Continued 
transfers of labor, 269, 270 
transfers of material. 269 
departmental classification, 

chart, 41 
factory orders, 

chart, 56 
handling material and material re- 
ports, chart showing, 95 
material received, 257-259 

Form, 258 
material requisitions, 266-269 
Form, 267 
combined with distribution rec- 
ord, 268 
method of compiling cost sheets, 

chart showing, 230 
overhead distribution, 272-274 
Form, 273 
chart, 183 

reports, chart showing, 197 
production, 274, 275 
Form. 274 
process method, 275 
productive labor reports, chart 

showing, 121 
salaries, 265 
shop order costs, 270-272 

Form, 271 
stock transfers, 269 
Summary record, 254-257 

Form, 256 
Superintendent, 
charging time of, 132, 133, 189 
reports to, 365 

salaries entered on separate record, 
265 
Supervisors, 
charging time of, 132, 189 
salaries entered on separate rec- 
ord, 265 
Supplies, 
miscellaneous, 

charging to overhead, 127, 186- 
188 
treatment under cost-plus con- 
tracts, 503 



Suspension of government contracts, 
540-549 (See also "Government 
contracts, cancellation of") 

Sweepers, charging time of, 132, 188 



Tabulating machines, 226 

Tag and coupon system, 

cost sheet, 215, 216 

Form, 216 
inventory method, 384 
production order and report, 202, 
203 
Tally sheet, 259 
Taxes, 
charging to overhead, 137 
excess profit, 
treatment under cost-plus con- 
tracts, 524 
fixed charge, 190, 191 
income, treatment under cost-plus 

contracts, 524 
treatment under cost-plus con- 
tracts, 521, 524 
Testing expense, 

treatment under cost-plus con- 
tracts, 536 
Time, 

charging to overhead, 188-190 
helpers, sweepers, truckers, charg- 
ing of, 132, 188 
inspection, charging of, 133, 189 
lost and idle, 

charging of, 131, 188 
treatment under cost-plus con- 
tracts, 514 
reports, 115-117 

Forms, 114, 115, 116 
superintendence, charging of, 132. 

133, 189 
tickets, 122, 123 
Tool room, 396 
Tools, 

and dies, perishable, 

depreciation charged to over- 
head, 187 
depreciation rates, 150, 152, 153 
direct charge, 129 
fixing responsibility for, 187 



INDEX 



575 



Tools — Continued 
and dies, perishable — Continued 
indirect charge, 129, 187 
reports and records of, 187 
classification under cost-plus con- 
tracts, 508 
considered as plant assets, 396 
controls of, 397 
identification of, 513 
method of, 

handling and storing, 510 

Form, 511 
safeguarding, 396 
storage, 510 
perishable, treatment under cost- 
plus contracts, 512 
repairs and replacements on cost- 
plus work, 513 
salvage on cost-plus work, 512 
treatment of scrap value on cost- 
plus work, 508 
treatment under cost-plus con- 
tracts, 507-509 
Total costs, 
verification of, estimating cost sys- 
tems, 462 

Forms, 463, 464 
Trade associations, 

efficiency progress through, 11 
uniform cost-finding, outgrowth of, 
II 
Trading business, cost systems for, 

401 
Trading statement, 348 
Training employees, expense of, 
treatment under cost-plus con- 
tracts, 536 
Treating departments, cost-finding 

method applicable to, 32 
Trial balance, preparing and proving, 

410 
Truckers, charging time of, 132, 188 



U 



Uniform cost methods (See "Cost- 
methods, uniform") 

"Uniform cost system" impracticable, 
12, 48 J 



Unit method of figuring costs, 455 
conditions to which applicable, 456 

Units, 
standardized, advantages of, 49 



Valuation, 

closing inventory, 451 

plant assets, 391 
Verbal orders, inadequacy of, 45, 46 
Verification of estimated costs (See 

"Estimating cost systems") 
Voucher, 

accounts payable (See "Accounts 
payable voucher") 

journal, 288 
Form, 289 
Voucher check, 249 
Voucher register, 250, 251 
Forms, 252, 253 

advantages and disadvantages, 251 

analysis record supplementary to, 

254-257 

Form, 256 
combined with purchase record, 254 
invoice adjustments on, 254 
posting from, 251 
purchase record and purchase 

ledger combined, 250 

W 

Wages, 
additional for overtime, charging 

of, 131 
deductions from, on pay-roll, 259 
rate, 

records, 119, 120 

Form, 120 
table, 124 
Wage systems, 
bases of, 98, 99 
bonus, 104-106 
differential, 104 
direct charge, 130 
Gantt, 104, 105 
indirect charge, 130 
labor reports used as production 
reports, 204 



5/6 



INDEX 



Wage systems — Continued 
bonus — Continued 

simple form of, 104 

stint, 105 

treatment under cost-plus con- 
tracts, 519 

treatment when in the nature of 
gifts, 130, 131 
contract, 106 
day-rate, 99, 100 

applicablity of, 100 

disadvantages of, 99, 100 
differential piece-rate plan, 103 
gain-sharing, 105 
kinds of, 98-107 
merit, 105 
piece-rate, 

labor reports used as production 
reports, 204 
piece-work, 100-103 

dissatisfaction arising from, 
100-102 

rate fixing, difficulties of, loi, 102 

rates, method of fixing, 102, 103 
premium, 104 

introduction of, 105, 106 

labor reports used as production 
reports, 204 

time rate, basis of, 104 
profit-sharing, 106-107 
standard operation, 105 
Stock-distributing, 106 



Waiting time, 

treatment under cost-plus con- 
tracts, 515 
Welfare work, 

treatment under cost-plus con- 
tracts, 536 
Wood-working plants, 
cost-finding methods applicable to, 

28, 32-34 
examination of, 425 
Working capital, 

interest on, chargeable to cost-plus 
contracts, 526 
Work in process, 

ascertaining value of, 233 
checking cost sheet figures, 239, 240 
controlling accounts, 307, 308, 318, 

319 

Form, 321 
posting to, 319, 330 
special and standard products, 
318 
cost sheets constitute inventory of, 

215. 233 
inventory, 

pricing of, 388 
sheet. 
Form, 380 
records, method of handling, 446 
stock records, 233 
Written factory orders, 46, 47 





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UNIVERSITY OF B.C. LIBRARY 




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CALL NO ^.....5686 Q..8 N..55, 

AUTHOR Niciiolson. 

TITLE .C.Qst ...ac count ir ' "• 



Library of THE UNIVERSP 



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